Qualified Charitable Distributions and the Tax Code

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If you are 73, you must take a required minimum distribution (RMD) from your traditional individual retirement account (IRA). If you have a lot of money stashed away, this could create a large tax liability.

But there is a way to lower your tax liability and help others. It’s a qualified charitable distribution (QCD). But what is a QCD, and how does it work?

How QCD Works

Once you reach 71½ , you may want to take a distribution from your traditional individual retirement account. Unfortunately, this increases your taxable income, but a QCD will lower that liability.

A QCD is a distribution from your traditional IRA that must go to a qualified charity. Not all charities qualify, but they must be 501 (c) (3). Contact a tax professional to see if the charity to which you want to donate qualifies.

To take advantage of this distribution, you must be at least 70½. You can also take advantage of a QCD if you are 73 and required to take an RMD. The required age for an RMD was raised to 73 in 2023 due to the 2022 SECURE 2.0 Act. (SECURE refers to Setting Every Community Up for Retirement Enhancement.)

What Is the Yearly Amount of a QCD?

There is a restriction on how much you can apply to a QCD. Previously, the amount was $100,000 per taxable year. But in 2022, thanks to the SECURE 2.0 Act, that amount is now indexed for inflation. The 2024 tax year limit for a QCD has increased to $105,000. For a married couple, it’s $210,000.

Types of IRAs Eligible

There’s no tax benefit from using a QCD for a Roth IRA. That’s because Roth IRA distributions are tax-free.

If they are non-ongoing, you can take a QCD from a Simplified Employee Pension Plan (SEP) and a Savings Incentive Match Plan for Employees (SIMPLE). This means that no contribution has been made in the year the QCD is taken.

You cannot take a QCD from a 401(k) plan.

QCD Diminishes Tax Liability

In order to use a QCD to diminish your taxable income, the distribution must go directly to the charity. It cannot go directly to you to donate. If it goes to you first, it will be taxed.

A QCD is not a deduction; it’s a reduction of income. In other words, they’re funds that never went into your pocket. It isn’t deductible since it’s not income and never goes to your wallet.

Unlike donating cash and appreciated securities, where you can donate one year and carry over the tax benefits to the next, a QCD cannot be carried over. If you make the QCD in 2023, it must apply to your income in 2023.

You also can’t front-load a QCD for future high-income years, as you can with contributions to a donor-advised fund or foundation.

Donors don’t receive a benefit for making a qualified donation to a charity. For example, you cannot purchase something at a charity auction or buy tickets to a golf event.

State rules for a QCD may vary. So, consult a tax advisor to learn the impact on state tax liabilities.

Reporting a QCD to IRS

According to the IRS, you report your qualified QCD on Form 1040 tax return. You generally report the full amount of the charitable distribution on the line for IRA distributions.

On the line for the for the taxable amount, enter zero if the full amount was a QCD. You then enter the QCD next to this line. The instructions for Form 1040 has instructions.

You’ll need to file Form 8606 if you made the QDC from a traditional IRA that you received a distribution from in the same year. This is a distribution in addition to the QDC.

How to Set Up a QCD

The money for your QCD must be a direct transfer to the charity. It cannot go to you. So, you'll need to contact your IRA custodian. They must either make an electronic transfer or send a check directly to the qualified charity.

This transfer must be made by the deadline of a normal distribution. This is usually Dec. 31 of the tax year in question.

When Does a QCD Make Sense?

There are scenarios when a QCD makes sense. One is if you have an RMD and would face a substantial tax liability. If you don’t need the funds, this makes sense.

Another would be if you want to reduce the balance of an IRA. This would lower future minimum distributions.

Suppose you want to give a large gift to a charity without the limitations of a tax deduction. Tax deductions usually range from 20–60 percent of your adjusted gross income (AGI). This doesn’t apply to a QCD. You can donate up to $105,000 and reduce your taxable income.

A QCD also works well if you want to avoid contributing to a foundation or donor-advised fund.

When Does a QCD Not Make Sense?

Although a QCD is a good option under specific circumstances, there may be better strategies for some.

If you have securities that have grown, it may make more sense to donate some or all of them to charity. You may receive a greater tax benefit to donate funds without using an IRAs QCD.

Some people like to donate to charities over time. A QCD won’t be for you if you prefer to take a deduction in the current year and then carry over your donation to another year. You can carry over by contributing to a donor-advised fund.

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