IRS Revises 2011 Reporting Requirements for Capital Gains Distributed by Charitable Gift Annuities

On December 16, 2011, the Internal Revenue Service (IRS) provided new 1099-R Instructions for annuitants that describe how to report 1099-R income on a Federal Income Tax return. Prior to then, these instructions stated that capital gains in Box 3 of the 1099-R should be reported on Form 1040 Schedule D line 13. The new instructions, in contrast, say the following:

If you are the beneficiary of a charitable gift annuity and receive a Form 1099-R showing an amount in box 3, report the Box 3 amount on Line 3 of Form 8949 that has Box C checked at the top. Enter “Form 1099-R” in column (a). Enter the Box 3 amount in column (e).

What this means is that the annuitant should complete a Form 8949 Part II (page 2) for Long-Term Capital Gains and Losses. The annuitant should then subtotal all amounts entered on Line 3 schedule of transactions to Line 4 on Form 8949, and then enter that subtotal on Line 10 of the Form 1040 Schedule D.

This instruction change does not affect taxes due.

What is Form 8949?

The Form 8949, Sales and Other Dispositions of Capital Assets, is designed for use with Form 1040 Schedule D and replaces the old Schedule D-1. Form 8949 was introduced this year to facilitate IRS computer cross-checking of transactions reported by brokerage firms on Form 1099-B. For amounts reported on Form 1099-B, the recipient would check box A or box B at the top of the Form 8949. Box C is for transactions the IRS would be unable to cross-check against Form 1099-Bs including charitable gift annuities.

What difference does this instruction change make?

This change is a technical rather than substantive one. Whether entered on Form 1040 Schedule D line 13 or entered on Form 8949 line 3 and subtotaled to Schedule D line 10, the capital gain will be totaled to Schedule D line 15, net long-term capital gain or (loss). So the annuitant will pay the correct capital gains tax whether using the old or new instructions.
Does an annuitant who already filed their 2011 Form 1040 using the old instructions need to refile?

The annuitant should, of course, consult their own tax advisor to ensure they properly reported their total capital gain on Form 1040 Schedule D line 15.

Should 1099-R preparers resend a revised 1099-R Instruction for Annuitants?

That is for each 1099-R preparer to decide, although one consideration would be whether doing so would confuse annuitants more than help them. In this regard, it is important to keep in mind that only annuitants who reported capital gains in box 3 of the 1099-R are affected; many charitable gift annuities do not have capital gains to report. Also, many donors will have already filed their tax returns. Contact PG Calc if you are a GiftWrap client and would like a revised copy of the 1099-R Instruction for Annuitants.

What if the annuitant gets a form letter from the IRS about their capital gains reporting?

We’ll be glad to help if that occurs, as a short explanatory letter to the IRS should clear up the issue.

Where can I get the new forms and instructions?

They are available from the IRS website:

Are capital gains for charitable remainder trusts or short-term capital gain for pooled income funds now reported on the new Form 8949?

No. These amounts still get entered directly on the Form 1040 Schedule D.

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