Qualified Charitable Distributions (QCDs) – Tax-Efficient Charitable Giving

QCDs can satisfy your Required Minimum Distribution (RMD) and reduce your adjusted gross income, thereby potentially avoiding higher tax brackets and phaseouts of tax deductions. 

What does this mean for you?

Making a qualified charitable distribution can potentially lower the amount of tax you pay while still supporting the charities you want to support. 

What is a Qualified Charitable Distribution?

A qualified charitable distribution is a distribution made directly to charity from an IRA account by someone who is at least age 70 ½. 

Although the RMD age is 73 or 75, depending on your birth year, you can start making QCDs when you are age 70 ½. Please note it’s not the year in which you turn age 70 ½. You must be age 70 ½ or older when you make the QCD. 

You can make a QCD for any amount up to $100,000. Amounts over $100,000 do not qualify. Starting in 2024, the QCD limit will increase with inflation. This was a change within the SECURE Act 2.0.

It’s also important to know that if you are using a QCD to satisfy your RMD, you cannot carry forward amounts donated above your RMD.

For example, if your RMD is $50,000 and you make a $75,000 QCD, you still have $75,000 that won’t be taxed, but you don’t get to carry forward $25,000 into the next year. 

What Kind of Charities Qualify for Qualified Charitable Distributions? 

You can make a qualified charitable distribution to certain 501(c)(3) charitable organizations. 

There are a few that don’t qualify: 

• Donor-advised funds
• Private foundations
• Supporting organizations

You can’t make a QCD to your own donor-advised fund, private foundation, or an organization that exists solely to support other charities. 

The other key part of the donation is that you cannot receive anything in return. For example, you can’t make a QCD in exchange for dinner at an auction, seats at a sporting event, or other membership benefits. 

Other than those limitations, many charitable organizations qualify. People commonly use them to support their religious organizations, art and culture charities, animal charities, environmental causes, education charities, and community development.    

There is a good chance that if you are age 70 ½ or older and are already making charitable contributions in cash or by your credit card that you could make a qualified charitable distribution for a better tax benefit.

How Do I Make a Qualified Charitable Distribution?

Although making a qualified charitable distribution is usually not as easy as inputting your credit card information, there are ways to simplify it. 

The method by which you can make a QCD varies by custodian. For example, at Schwab, you can request a QCD directly from Schwab or set up check writing capabilities on your IRA.  

Here are the differences:

These differences are important because one method may be easier than another depending on how often you want a check sent and how many charities you are supporting.

For example, if you are trying to support more than one or two charities per year, setting up a request with Charles Schwab may be easier than writing multiple checks in a year. 

Also, if you want a check to be sent more than once per year, you may not want to write a check each time. You may prefer setting up authorization and then clicking a few buttons each time you want it sent. You may also prefer to set it up on an automatic distribution schedule. 

You also don’t have to choose one method over the other. You may want to get check writing capabilities to write a check once in a while, but use the option to have Schwab send a check for recurring QCDs or for charities you plan to support each year. 

Timing Issues: If you decide to make a QCD by writing a check from your IRA near the end of the year, pay special attention to when it may be cashed. For example, if you are hoping the QCD will fulfill the remaining $10,000 of your RMD, but it isn’t cashed until the following year, you may have an RMD shortfall, which could result in a 25% or 10% penalty on the amount that should have been distributed. I’ve seen issues where people write checks in late December, but the charity does not cash it until January. In that case, they have an RMD shortfall and the check amount counts against the RMD in the following year instead. 

It’s important to note that QCDs cannot be made from 401(k)s. They must be made from an IRA.

Although the mechanics are important to understand, it’s also important to know that the order in which you make distributions from your IRA is critical.

For example, if you have a $50,000 RMD and decide to do a $50,000 distribution to yourself and then decide you want to make a $25,000 QCD, you can’t undo it. If you distribute $25,000 after to a charity, you still have $50,000 that is taxable to you, but the $25,000 to the charity would not be taxable. 

That’s why deciding if you want to do a QCD earlier in the year is important. In the previous example, you could have distributed $25,000 as a QCD and $25,000 to yourself. In that scenario, you would have had $25,000 taxable to you. 

The other key step to follow is to get a receipt from the charitable organization acknowledging receipt of your donation and that no goods or services were provided in exchange for the donation. Here is the other information the written acknowledgment should include. 

If you want to make a qualified charitable distribution, it’s vital to understand the mechanics of it at your custodian and the timing. I often encourage people to make QCDs earlier in the year instead of waiting until the end of the year. It’s one less thing to do at the end of the year when custodians are often slower to process paperwork and charities often receive the most support. 

Can I Claim a Charitable Income Tax Deduction for a Qualified Charitable Distribution? 

A common question that comes up is “Can I deduct a QCD from my income tax?” 

The answer is no, but that is okay because you are likely receiving a much better tax advantage with a qualified charitable distribution. 

When you make a qualified charitable distribution, you are reducing the amount that goes on line 4b of your tax return. 

This is generally better than an income tax deduction that goes on Schedule A. 

If you contributed to a charity using your credit card or giving cash, you have to have enough itemized deductions to get over the standard deduction to benefit from the donation. With a qualified charitable distribution, you don’t have to itemize your deductions to get a benefit. You reduce your income dollar for dollar up to the $100,000 maximum amount. 

How Do I Report Qualified Charitable Distributions on My Taxes?

Reporting a qualified charitable distribution on your income taxes is simple, but not easy because custodians do not track or report your QCDs. 

A custodian simply needs to report the total amount of money distributed from your IRA. They don’t track how much of it went to you personally and how much went to charity.

For example, if you distributed $25,000 to your bank account and $25,000 to a charity with a qualified charitable distribution, the 1099-R is going to report a $50,000 distribution. Below is an example of how it may look. 

Notice how it shows a taxable amount of $50,000 despite only $25,000 being taxable. The custodian doesn’t track the QCDs. This is why it’s vital to track your QCDs throughout the year. I normally recommend people use a spreadsheet to note the amount and date. When it comes to tax time, you can simply add up the total sent to charities and double check it against the total distribution and the amount that you personally received, as well as any tax withholding. 

Once you know how much of your total distribution was a qualified charitable distribution, you need to report it properly on your tax return.  

Below is an image of how you could report a $50,000 IRA distribution, of which $25,000 was a qualified charitable distribution. In this example, line 4a is $50,000 to show the full amount of the distribution, but only $25,000 goes on line 4b, which is the taxable amount. Then, you put “QCD” near line 4b to show why the full amount was not taxable. 

Does a Qualified Charitable Distribution Make Sense for Me?

Now that you know more about qualified charitable distributions, you may be wondering, “Is a qualified charitable distribution the way I should be giving to charity?” 

As with most personal finance questions, the answer is…it depends. 

QCDs can make sense in the following situations (all assuming you are age 70 ½ or older):

• You already contribute to charity.
• You don’t need the full amount of your RMD and are charitably inclined.
• You don’t itemize deductions because you take the standard deduction.

If you are age 70 ½ or older and want to give to charity, a qualified charitable distribution is often the most effective way to give. While giving via cash or credit cards may provide a below the line deduction on your tax return, you must itemize to get any benefit from it. If you don’t itemize, there is no tax benefit. 

Even if you give highly appreciated stock to charity or use a donor-advised fund, a QCD is usually more effective. A QCD reduces your adjusted gross income, which can reduce Medicare premiums and help with other tax phaseouts. 

If you give highly appreciated stock, you get a below the line deduction, which won’t help with potentially lowering your Medicare premiums or other tax situations decided by your adjusted gross income. 

A qualified charitable distribution can be a very effective way of reducing the amount of income that is taxed.

QCDs may not make sense in the following situations:

• You have a large donation you want to make to offset a huge tax liability.
• You want to claim a charitable donation today, but want to give the money out over time.
• You don’t want to track many smaller donations. 

If you have a huge tax liability due to the sale of a business, home, rental property, or other taxable event, you may be looking to give a large lump sum to help offset the tax, but you aren’t ready to immediately give it to the charities you want to support.

In those situations, a QCD may not be the preferred method because you have to give the full amount away immediately, and the donation won’t help offset the tax liability. This is where a donor-advised fund can be helpful because you could make a large donation of highly appreciated stock, immediately use it to help offset the tax liability, and then give grants away over time to the charities you want to support. 

Another reason you may want to consider a donor-advised fund instead of a qualified charitable distribution is if you contribute to many different charities. Many people don’t want to track ten or twenty different donations to charities for $50 or $100 when making qualified charitable distributions. In those situations, they may prefer to make a donation of highly appreciated stock to a donor-advised fund, receive a tax deduction, and then not have to track when they make grants out of the account. 

If you are 70 ½ or older, have IRA assets, and contribute to charity, I’d recommend you consider making qualified charitable distributions instead of giving cash. 

Final Thoughts – My Question for You

Qualified charitable distributions are an effective way to contribute to charity.

QCDs are often more tax efficient than giving cash because it can reduce your adjusted gross income and result in less of your income being taxed. They are also a great way to fulfill your RMD requirements. 

While setting up the ability to make QCDs can take time, and reporting them requires you to carefully track your donations, the extra time and energy is worth it in many situations.

If a QCD does not make sense for you, I’d consider looking into using a donor-advised fund or contributing highly appreciated stock to charity. 

I’ll leave you with one question to act on. 

Would a qualified charitable distribution be an effective way to give in your situation?