Qualified Charitable Distributions
Individuals who own IRAs generally must begin to start receiving distributions from their IRAs by April 1 of the year following the year in which they reach age 70½ (if you were born before July 1, 1949; if you were born after June 30, 1949, age 72). These are known as Required Minimum Distributions (RMDs). Such distributions would be reported as taxable income on Form 1099-R, and may incur an income tax liability.
Individuals who make donations to charities may report such contributions as itemized deductions on Schedule A. To the extent that the individual has taxable income to be offset, the net result of the charitable contributions is a reduction of income tax liability.
However, individuals who take the standard deduction receive no tax benefit from making charitable contributions.
A qualified charitable distribution (QCD) is a nontaxable distribution made directly by the trustee of your IRA to an organization eligible to receive tax-deductible contributions. You must be at least age 70½ when the distribution was made. Also, the organization must provide you with the same type of written acknowledgment of your contribution necessary for you to claim a deduction for such charitable contributions. A QCD will count towards satisfying your RMD requirement for the year. Note that SEP or SIMPLE IRAs are not eligible for making QCDs, however.
| Year | Maximum Annual QCD Exclusion | 2025 | $108,000 |
|---|---|
| 2024 | $105,000 |
| 2023 | $100,000 |
Any QCD in excess of the maximum annual exclusion limit is included in income, as any other distribution. If you file a joint return, your spouse can also make a QCD and exclude up to the maximum annual exclusion limit. If you file a joint return, your spouse can also make a QCD and exclude up to $100,000. The amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income.
The ability to contribute directly to a charity from an IRA is a very important tax advantage for certain taxpayers. The provision allows IRA owners who are 70½ (if you were born before July 1, 1949; if you were born after June 30, 1949, age 72) to give directly to a charity and avoid reporting that income on their tax return. Thus, a QCD lowers Modified Adjusted Gross Income (MAGI). This could lower or eliminate the taxation of Social Security benefits. A QCD could also lower Medicare Part B and prescription drug premiums for those with higher income because MAGI is used to calculate such premiums.
Example
Here’s an Example of how a QCD could benefit a retired couple with moderate taxable retirement income:
- Jack and Jill are both over 73 years old.
- For 2024, Jack and Jill received interest income of $3,150. Jack received a required minimum distribution (RMD) from an IRA of $11,115. Jill received her taxable pension of $40,000, and their combined Social Security income was $40,000 for the year.
- Their itemized deductions include real estate taxes of $10,000 and charitable contributions of $10,000.
- The Standard Deduction for senior taxpayers filing as “married, filing jointly” in 2024 is $32,300.
- Jack and Jill made Federal quarterly estimated tax payments of $6,000 during 2024.
Here is a summary of certain lines from Jack and Jill’s 2024 Form 1040-SR tax return:
| Line | Description | "Normal" (No QCD) | QCD Utilized | |||
|---|---|---|---|---|---|---|
|
|
||||||
| 2b | Taxable interest | 3,150 | 3,150 | |||
| 4b | IRA distributions (taxable) | 11,115 | QCD 1,115 | |||
| 5b | Pensions (taxable) | 40,000 | 40,000 | |||
| 6a | Social security benefits | 40,000 | ||||
| 6a | (taxable amount) | 31,725 | 23.225 | |||
| ---------- | ---------- | |||||
| 9 | Total income | 85,990 | 67,490 | |||
|
|
||||||
| 11 | Adjusted gross income (AGI) | 85,990 | 67,490 | |||
| 12 | Standard deduction | 32,300 | 32,300 | |||
| ---------- | ---------- | |||||
| 15 | Taxable income | 53,690 | 35,190 | |||
|
|
||||||
| 16 | Tax | 5,977 | 3,757 | |||
| 26 | 2024 Estimated tax payments | 6,000 | 6,000 | |||
| 35a | Amount refunded to you | 23 | 2,243 | |||
By utilizing a QCD to make their charitable contributions of $10,000, Jack and Jill’s taxable IRA distributions, taxable Social Security income, total income, adjusted gross income, taxable income, and income tax all decrease. (Note: Deductible medical expenses increase, but the itemized deductions still don’t exceed the standard deduction amount).
In this simple example, taxable Social Security benefits are reduced by $8,500, from $31,725 to $23,225. The taxable income is reduced from $53,690 to $35,190. The $10,000 QCD reduced taxable income by $18,500, $1.85 for every $1. Finally, their Federal income tax liability decreased from $5,977 to $3,757, a savings of $2,220.