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Qualified Charitable Distributions from IRAs

Qualified Charitable Distributions from IRAs

Taxation Wealth Management Financial Planning
David Chandler
April 2, 2025

Qualified Charitable Distributions (QCDs) are a powerful tool for individuals who want to support charitable organizations and benefit from the tax breaks afforded by charitable giving. This financial strategy is particularly relevant for retirees who have reached the age where they must take the Required Minimum Distribution (RMD) from the IRA (Individual Retirement Account). In this article, we explain what you need to know about QCDs to make them work to your advantage.

What is a Qualified Charitable Distribution?

A QCD allows individuals who are 70 ½ and older to donate up to $108,000 (2025 threshold, up from $100,000 in previous years and indexed for inflation) per year directly from their IRA to a qualified charitable organization. The benefit of such a QCD is that the donated amount is excluded from taxable income, reducing your tax liability.

QCDs can count as all or only part of your RMD. The RMD kicks in at age 73 (as of 2023 under the SECURE 2.0 Act). By making a QCD, individuals can meet the RMD requirement without increasing their taxable income.

Eligibility and Rules for QCDs

For a distribution from an IRA to qualify as a QCD, the following requirements must be met:

  1. Age: The IRA holder must be at least 70 ½ at the time of the distribution from the IRA to the charitable organization.

  2. Account Type: QCDs can only be made from traditional IRAs, inactive Simplified Employee Pensions (SEPs), and Simple IRAs. You cannot make a QCD from a 401(k) or other retirement account unless the funds are first rolled over into an IRA.

  3. Charity Type: The donation must go to a qualified charitable organization, as defined by the IRS. Some entities, such as donor-advised funds and private foundations, are not eligible, and distributions to those entities would not qualify as a QCD.

  4. Distribution Method: The funds must be provided to the qualified charity through a direct transfer, from the IRA custodian to the charity’s account. If the IRA account holder receives the funds first, the distribution does not qualify as a QCD.

Benefits of a QCD

Making a QCD can benefit you in several ways:

  1. Tax Savings: Because a QCD is not included in taxable income, these distributions can lower overall tax liability and prevent the account holder from being pushed into a higher tax bracket simply to meet their RMD.

  2. AGI Management: Reducing your aggregate gross income can have a positive ripple-effect on other tax calculations, such as Medicare premiums and Social Security taxation.

  3. Efficient Charitable Giving: QCDs allow you to support causes you care about – while also leveraging tax advantages.

  4. RMD Compliance: For those subject to RMDs, a QCD can help satisfy the distribution requirement without increasing taxable income.

  5. Standard Deduction: QCDs do not require itemized deductions.

How to Make a QCD

While the process to make a QCD is not exceptionally complicated, you do want to be careful to satisfy all the requirements and complete all the steps required by both your IRA custodian and the charity to whom you are giving.

  1. Consult your IRA Custodian. Notify your IRA Custodian that you wish to make a QCD, and request any forms that need to be completed, or the procedures for initializing the transaction.

  2. Verify the Charity’s Eligibility. Ensure that the organization to whom you wish to donate is a qualified charity under IRA guidelines. You can typically start by asking for the organization’s proof of exempt status.

  3. Request Direct Transfer. Direct the IRA custodian to transfer the funds directly to the charity. Retain documentation of the transfer to support your QCD on your tax return.

  4. Report the QCD on your tax return. Although the distribution is not taxable, you must report the QCD on your tax return. Your tax preparer will help ensure that the QCD is properly included, and does not increase your taxable income.

Key Considerations When Making a QCD

Before and while you make a QCD, keep these items in mind for planning and tracking purposes.

Annual Limit

The annual limit (see above) applies per individual, not per account. So, married couples filing jointly can each make a separate QCD up to the annual limit from their respective IRAs.

Tracking Donations

Keep detailed records, including written acknowledgements from the charity to whom you donate, to substantiate your QCD when it comes time to prepare your tax return. You should still receive a 1099-R reporting distributions from your IRA, but QCDs are generally not included on that 1099-R if your IRA custodian properly understood the purpose of that transaction.

State Taxes

The reduction to taxable income afforded by making a QCD only applies to the federal taxable income calculation. Check with your state’s tax laws to determine how QCDs are treated related to the state taxable income under your state’s tax laws.

Conclusion

QCDs (Qualified Charitable Distributions) provide a win-win solution for retirees striving to meet their philanthropic goals while optimizing their personal tax strategy. By understanding the rules and benefits of QCDs, individuals can make informed decisions that align their financial and charitable objectives. Consult with a tax professional to ensure compliance with the tax laws that apply to you, and maximize the advantages offered by this valuable tool.

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