Understanding Qualified Charitable Distributions (QCDs): A Smart Way to Give Back While Reducing Your Taxes

 By Brian McGeough, CFP® and Senior Relationship Manager

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When it comes to charitable giving, there are many ways to contribute to causes that matter to you. But for individuals who are over 70 ½ years old, there is a great tax-advantageous strategy to consider:  Qualified Charitable Distributions (QCDs).

What is a Qualified Charitable Distribution (QCD)?

A QCD allows people who are 70 ½ or older to make a direct transfer of funds from their IRA to a qualified charity. The amount of the transfer does not count as taxable income.  For 2025 the QCD limit is $108,000 for an individual.   Married couples can each contribute up to their individual limit for a total of $216,000.

Key Benefits of QCDs

1) Not counted as taxable income

The amount donated to a charity through a QCD is not counted as taxable income and will not increase the donors adjusted gross income.  As a result, the amount donated will not push the donor into a higher tax bracket and can avoid triggering phaseouts, which limit or eliminate some kinds of tax deductions.

2) Satisfy your Required Minimum Distribution (RMD)

For those that are at the age when they have to take an RMD, the amount donated through a QCD will count towards the RMD but will not be counted as taxable income.  This can give the donor the ability to make larger contributions than they could if they simply donated cash or other assets.

3) Reduce the balance of the IRA to lower future required minimum distributions

 RMDs are calculated using the balance of the account as of December 31 of the previous year.  A multiplier is then applied to calculate the amount of the RMD for the year.  Donating through a QCD can help reduce the balance of the IRA without increasing taxable income and resulting in lower required minimum distributions in the future.

Below is a table that highlights the benefits of donating to a qualified charity with a QCD

Source: Kiplinger.com

QCD Tax Traps

 ·    To receive QCD treatment, a distribution of IRA funds must be done as a direct transfer to a qualifying charity

·     Donor advised funds and private foundations do not qualify for QCD treatment

·     In the past, a QCD was reported on a 1099-R as a normal (taxable) distribution and the IRA owner had to inform their tax professional to ensure the QCD tax benefit was received.  For the 2025 tax year the IRS has added a code on the 1099-R that will identify the distribution as a QCD but it is still important for the donor to work with their tax professional to make sure all the QCD qualifications rules have been followed.

At Chatham Wealth Management, we work with individuals and their tax professionals to make sure that their assets are managed in the most tax efficient way.  If you have questions about QCDs or about financial planning in general, please reach out to us at info@chathamwealth.com

Disclosure

• Chatham Wealth Management is registered as an investment adviser with the SEC. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the adviser has attained a particular level of skill or ability.

• Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be profitable for a client's portfolio.