Qualified Charitable Distributions (QCDs): A Tax-Savvy Giving Strategy

For retirees looking to support causes they care about while managing their tax obligations, Qualified Charitable Distributions (QCDs) offer a powerful solution. Here’s a detailed guide to QCDs and how they work.

What is a QCD?
A Qualified Charitable Distribution (QCD) allows individuals aged 70½ or older to donate directly from their IRA to a qualified charity. The distribution counts toward your Required Minimum Distribution (RMD) but is excluded from taxable income. To qualify as an offset to the RMD, the QCD must be made first, before your RMD distribution to yourself.

Key Benefits of QCDs

Reduces Taxable Income: Unlike regular withdrawals, QCDs aren’t added to your adjusted gross income (AGI), which can help:
- Avoid pushing yourself into a higher tax bracket
- Reduce taxes on Social Security benefits.
- Lower income for Medicare Part B/D premium thresholds
Satisfies RMD Requirements: The amount donated via QCDs counts toward your annual RMD. This can be particularly helpful if you don’t need your full RMD for living expenses.
Maximizes Charitable Impact: You’re able to donate pre-tax dollars, making your charitable giving more efficient.
Avoids Itemized Deduction Limitations: Since the QCD is excluded from income, it doesn’t require itemizing deductions to receive a tax benefit. This is especially advantageous for retirees who take the standard deduction.

How Does a QCD Work?

Eligibility
- You must be at least 70½ years old at the time of the distribution.
- The QCD must come directly from an IRA (Traditional IRAs, Inherited IRAs, and inactive SEP or SIMPLE IRAs are eligible; 401(k)s are not).
Annual Limit: You can donate up to $108,000/person in 2025. Married couples filing jointly can donate up to $216,000 if each spouse has an eligible IRA.
Direct Transfer to Charity: Funds must be sent directly from the IRA custodian to the qualified charity. If you receive the funds first and then donate, the distribution will be taxable.
Qualified Charities: Donations must go to a 501(c)(3) organization eligible to receive tax-deductible contributions. Certain organizations, such as donor-advised funds and private foundations, do not qualify.
Tracking and Reporting: Ensure the distribution is labeled as a QCD on your tax return. The distribution from the IRA will appear on Form 1099-R from your IRA custodian, so you’ll need to keep records confirming the transfer to the charity. You will need to make adjustments on your tax return to indicate the amounts that went to charity before distributions were made to you.

Example of QCD in Action
Scenario: John, age 74, has an IRA and is required to take a $20,000 RMD for the year. John doesn’t need this money for living expenses and wants to support his favorite charity.

Steps:

John directs his IRA custodian to transfer $15,000 directly to the charity.
The $15,000 satisfies part of his RMD and is excluded from his taxable income.
John only reports the remaining $5,000 RMD as taxable income.

Result: John lowers his taxable income, supports a cause he cares about, and fulfills his RMD requirements.

QCD Planning Tips

Make Donations Early: Complete QCDs well before the December 31 deadline to ensure timely processing.
Use for Large Donation: If you’re making significant charitable contributions, QCDs can reduce taxable income more effectively than claiming a deduction.
Coordinate with RMDs: If your RMD is more than you need, direct a portion to QCDs to minimize tax impacts.
4. Work with an Advisor: Proper documentation is critical to avoid IRS scrutiny. We can help you coordinate and report QCDs correctly.

Final Thoughts
Qualified Charitable Distributions offer retirees a win-win opportunity to manage taxes and make a meaningful impact. By integrating QCDs into your financial plan, you can maximize your giving while preserving your wealth.

Have questions about QCDs or want to incorporate them into your retirement strategy? Contact Birch Street Financial Advisors today!