CHARITABLE GIVING USING QUALIFIED CHARITBLE DISTRIBUTIONS

By:  Marianne Johnston, Esquire

What is a Qualified Charitable Distribution?

A Qualified Charitable Distribution (QCD) is a tax strategy that allows you to support charities dear to your heart directly from your individual retirement account (IRA).

When you make withdrawals from a traditional IRA account, those distributions are usually taxed as ordinary income to the account holder.  An individual aged 70½ years or older may direct a distribution to their favorite charity and avoid paying a tax on the distribution.

Recapture Tax Deduction for Charitable Contributions

Currently, the vast majority of Americans elect to take the standard deduction when they file their federal income tax returns.  Because charitable deductions are itemized, these taxpayers do not receive a tax benefit for their charitable contributions.  By making a QCD from a traditional or inherited traditional IRA, the taxpayer avoids paying income tax on a pre-tax retirement account by directing those distributions to their favorite charity.  The taxpayer thus enjoys the benefit associated with a charitable contribution without having to itemize.

QCDs Count Toward a Required Minimum Distribution

A Required Minimum Distribution (RMD) is the minimum amount that an individual with a tax deferred account such as a traditional IRA must withdraw from their account once they reach a certain age or if they inherit a traditional IRA subject to the ten-year rule imposed by the Setting Every Community up for Retirement Enhancement (SECURE) Act of 2020.  A taxpayer may use a QCD to satisfy their RMD.

Limitations Associated with QCDs

♦Age Requirement. To qualify for a QCD, you must be aged 70½ years or older at the time of distribution.  Please note that even though the SECURE Act raised the age upon which an individual must start taking RMDs from their traditional IRAs, the age for QCDs remains 70½.

♦Annual Limit. In 2025, a taxpayer is limited to a total of $108,000.00 per year in QCDs.  This limit is indexed for inflation annually.  The full $108,000.00 can be directed to a single charity or spread over multiple charities.  For married couples with both spouses having IRAs, a combined donation of $216,000.00 in QCDs is permitted.

♦QCDs Can Only be Processed From IRAs. A taxpayer cannot use their 401(k) or 403(B) retirement plan to make a QCD.  The balance in such a retirement plan would have to be rolled over into a traditional IRA before making a QCD.

♦QCDs Must be Sent Directly to Charity. The owner of the IRA or inherited IRA must never come into contact with the IRA distribution.  The custodian of the IRA account must pay the QCD to the charity directly.  Note, a taxpayer who utilizes a QCD will still receive a 1099-R tax form from their IRA custodian.  There is no special tax code indicating the distribution was a QCD.  The taxpayer or their accountant must designate the distribution as a QCD on their federal income tax return to have it excluded from taxable income.  Retain proper documentation of the QCD, including acknowledgement letters from the recipient charities.  Having these records will ensure accurate tax reporting.

Summary

In summary, QCDs allow individuals who own or inherit traditional IRAs to benefit their favorite charity while recapturing the federal income tax deduction that may be lost by not itemizing deductions.  At the same time, the QCD counts toward the taxpayer’s RMD for that year.