How QCD’s Save Taxes and Benefit Charities
One useful end of year tax strategy that brings with it aid for struggling charities is the QCD or Qualified Charitable Distribution. In fact, there may be few actions providing as much satisfaction as knowing that, at the same time you are reducing your personal federal income taxes you can be benefiting your favorite charities. This is especially true now when considering federal budget cuts for fiscal 2026. Here is how it works.
Taxpayers born between 1951 and 1959 must, under current IRS rules, begin to take Required Minimum Distributions from traditional IRA’s at age 73. For individuals born in 1960 the RMD age is 75. Many taxpayers, of course, have already reached the required age and are already taking RMD’s .
QCD’s use the federal tax code to benefit taxpayers in this situation.
- Required Minimum Distributions. Required Minimum Distributions for affected seniors are often maligned since, whether they like it or not, taxpayers then receive payments based on a formula from their traditional retirement accounts. Unless other factors intervene, they must pay taxes on the accumulated income previously exempted. The justification for Required Minimum Distributions from the governmental standpoint is obvious. Traditional IRA’s (and rollover IRA’s and so on) give a deferred tax benefit. If taxpayers were permitted to continue the deferral of tax indefinitely the government would never recover the tax deferral. QCD’s known as Qualified Charitable Distributions in the right case serve two purposes, the one being to save some taxes that otherwise would be due and the other to benefit a favored qualified charity.
- QCD’s – The Process. For those interested in learning more your first step would be to contact your IRA’s custodian (where your IRA is held) and indicate you are interested in making a QCD. Some custodians provide step by step information to get started online which then allows you to follow up directly with their representative.
- When RMD’s are required. How it works. If you hold one or more traditional (not Roth) Individual Retirement Accounts (IRA’s) or similar tax qualified funds (such as SEP IRA, SIMPLE IRA or 401(k) or 403(b)), you reach a point when you are required by the federal government to begin to withdraw money in specified amounts (the RMD) from the account. Taking your RMD adds these funds to your taxable income which then has the unwelcome effect not only of giving you more taxable income (whether you want or need it currently or not) but also of potentially pushing you into a higher income tax bracket. The taxable income increase might also limit or eliminate some types of tax deductions such as some personal exemptions and itemized deductions and could trigger higher taxes on Social Security income. So, even if you do not want or need the distribution from the account, you are required to take it and count it in your income. There is a substantial penalty if you do not do so.Here is how a QCD can help.
- How QCD’s work. A qualified charitable distribution can allow individuals who are required to take RMD’s to donate up to $108,000 total to one or more qualified charities directly from a taxable IRA without the funds being counted as part of their income. You must, however, follow the rules so be careful and never attempt to do this on your own. Because QCD’s do not increase taxable income, high tax rates, phaseouts, and other unpleasant effects of receiving RMD’s into income may be avoided or reduced in effect. Since the QCD also reduces the overall balance in the IRA, it also potentially can decrease the RMD required to be taken in subsequent years.
- When do you need to complete the QCD? If you want to make a QCD count toward your minimum annual IRA distribution it must be made by December 31 of the tax year in question – so soon.
- What kind of charitable contributions count? Not all charitable contributions necessarily count. QCD’s cannot be made to donor-advised fund sponsors,
private foundations and supporting organizations, though these are categorized as charities. Donors should check to make certain the organization qualifies before
making a gift. - What kind of charities might benefit by a QCD. You might check with your church as one possibility (churches generally qualify) or any number of worthy 501(c) (3) charities. Food banks are a possibility. Charities that may have lost their funding in recent cuts are another. Just make sure they qualify. Again, consult with your CPA or financial advisor who is familiar with the process.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.