Making The Most of Qualified Charitable Distributions (QCDs)

For many taxpayers, charitable giving isn't just about generosity - it's also about strategy. What if you could strengthen your charitable giving and cut your tax bill at the same time? That's exactly what qualified charitable distributions make possible. For IRA owners, QCDs offer a simple way to turn required withdrawals into meaningful gifts, allowing you to support the causes you care about while potentially reducing your taxable income. Instead of viewing RMDs as just another annual obligation, QCDs let you use them to make a lasting impact in the community.

Understanding the Basics

A qualified charitable distribution is a donation made directly from an IRA to an organization that is recognized as tax-exempt under section 501(c)(3) of the Internal Revenue Code. These organizations typically include those that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals. However, in order for a donation to be treated as a QCD, there are several rules and requirements that must be met, which are important to understand before attempting to make one.

• Age Requirement - The taxpayer must be at least 70 ½ years old at the time of the donation. Even though the RMD (Required Minimum Distribution) age has increased, the QCD age remains at 70 ½).

• Eligible Account - The charitable contribution must come from traditional IRAs. Employer-based plans (like 401(k) or 403(b)) generally aren't eligible unless rolled into an IRA first.

• Eligible Charities - The charity must be a qualified 501(c)(3) organization. Ineligible recipients include donor-advised funds, private foundations, and supporting organizations.

• Timing - To count for a given year, QCDs must be completed by December 31. They can be made even after taking some or all of your RDM for the year but must be sent directly to the charity.

• Documentation - You must obtain a written acknowledgement from the charity confirming the donation, amount, date, and that no goods or services were received in return.

Reducing Taxes

One of the biggest advantages of a QCD is that it can reduce your taxable income, which will lower your overall tax bill. Unlike standard IRA withdrawals, which are generally included in your taxable income, a QCD is excluded from income entirely - meaning the money goes straight to the charity without increasing your tax liability. This exclusion can have a ripple effect on your taxes. By lowering your Adjusted Gross Income (AGI), a QCD may help:

• Reduce or avoid higher tax brackets: Lower taxable income can prevent you from moving into a higher tax bracket.

• Minimize taxes on Social Security benefits: Because these benefits are calculated based on your AGI, a lower AGI may reduce the portion of Social Security income that is taxable.

• Lower Medicare premiums: Medicare Part B and Part D are based on income brackets, so a lower AGI can potentially reduce your monthly premiums.

The threshold for itemizing deductions on a tax return went up substantially after the Tax Cuts and Jobs Act of 2017. That threshold was made permanent with the passage of the One Big Beautiful Bill (OBBB) Act earlier this year. The new law also added a floor for deducting charitable contributions. Beginning in 2026, charitable contributions will not become deductible until they exceed 0.5% of adjusted income. If you make QCDs, you receive the full benefit of the contribution whether you itemize or not and without a deduction floor.

Important Updates This Year

The rules for Qualified Charitable Distributions remain largely the same, but there were a few important updates in 2025 that IRA owners should be aware of to make the most of their charitable giving:

The annual QCD limit has increased to $108,000 per person, indexed for inflation. This gives donors a greater opportunity to make meaningful gifts directly from their IRAs without increasing taxable income. Married couples can each contribute up to this limit from their own accounts, for a total of $216,000.

A new option allows a one-time QCD to a split-interest charitable entity, such as a Charitable Remainder Trust (CRT) or Charitable Gift Annuity (CGA). The limit for this special type of donation is $54,000, offering more flexibility for donors with complex estate or giving plans.

IRA custodians will now report QCDs on Form 1099-R using Code Y in Box 7 for distributions made in 2025 and beyond. This makes it easier to distinguish QCDs from taxable distributions and helps ensure that amount is properly excluded from income on your tax return. It's still a good idea to send a note to your tax preparer just in case the 1099 form isn't coded correctly.

Completing a QCD from Start to Finish

Following the proper process ensures your donation qualifies for the tax benefits while supporting the causes you care about.

1. Confirm your Eligibility - Make sure you meet the age requirement of 70 ½ or older, and that your IRA account is eligible.

2. Choose a Qualified Charity - Select a 501(c)(3) organization to receive your distribution. It would be worth double-checking with the charity to confirm their eligibility before initiating the transfer.

3. Make a Direct Transfer - Contact your IRA custodian to set up the transfer properly. If the money is sent to you first and then forwarded to the charity, it may disqualify the donation.

4. Ensure Adequate Timing - Complete the donation by December 31.

5. Keep Documentation - Obtain the documentation confirming the donation amount, date, and that no goods or services were received. Save this documentation for your tax reporting.

Following these steps, you can ensure your QCD is executed properly, allowing your required IRA withdrawals to become more powerful charitable gifts while maximizing potential tax benefits.

Maximizing the Impact of Your Charitable Giving

Qualified Charitable Distributions offer IRA owners a unique opportunity to combine generosity with smart tax planning. By understanding the rules, staying up to date on the recent updates, and following the proper process, you can ensure your QCDs are executed correctly while maximizing their impact.

From reducing taxable income and managing your AGI to supporting the causes you care about, QCDs turn required distributions into powerful tools for both financial strategy and charitable giving. With thoughtful planning and strategic execution, your IRA withdrawals can do more than meet obligations - they can leave a lasting legacy. If you want to discuss this and other tax saving strategies, email jessica@fpgtax.com or call us at (816) 941-2900.