How Seniors Can Maximize Charitable Giving Through IRA Distributions

With recent changes to the tax landscape, one charitable giving strategy has become even more appealing for older Americans: Qualified Charitable Distributions (QCDs). While the rules governing QCDs remain unchanged, new deductions and income thresholds introduced in the 2025 legislative package—referred to as the “megabill”—have significantly increased their value for eligible taxpayers.

What Are Qualified Charitable Distributions?

QCDs allow individuals aged 70½ or older to donate directly from a traditional IRA to a qualified charity without counting the distribution as taxable income. This strategy offers multiple benefits:

• The distribution counts toward Required Minimum Distributions (RMDs): Donations satisfy part or all of a retiree’s annual RMD (which begins at age 73).
• Lowers Adjusted Gross Income (AGI): Reduces taxable income, helping avoid income-based surcharges or benefit phaseouts.
• Available to non-itemizers: QCDs offer tax advantages regardless of whether the taxpayer itemizes deductions.

For 2025, the annual QCD limit is $108,000 per person, or $216,000 per couple (if both qualify). To be eligible, the funds must be transferred directly from the IRA to the charity.

Why QCDs Are More Valuable Now

The 2025 tax law changes introduced several new deductions tied to a taxpayer’s AGI or Modified AGI (MAGI), including deductions for:

• Tips
• Overtime income
• State and local taxes
• Senior taxpayers
• Car loan interest

Because QCDs reduce AGI, they may help taxpayers qualify for these new deductions or enhance the value of existing ones.

Additionally, new limitations on itemized deductions—especially for charitable contributions—are scheduled to take effect in 2026. These limitations won’t apply to QCDs, which makes them an even more attractive strategy moving forward.

QCDs also stand out because they exclude the donation from income, rather than treating it as a deduction. This is particularly beneficial for the growing number of taxpayers who claim the standard deduction rather than itemizing.

Additional Benefits of Lowering AGI Through QCDs

Reducing AGI with QCDs can produce ripple effects across a retiree’s tax situation. Many thresholds and surcharges are based on AGI, including:

• Medicare IRMAA premiums, which increase sharply once income passes certain thresholds
• The 3.8% Net Investment Income Tax
• Phaseouts of credits and other deductions

Even small reductions in AGI may help taxpayers avoid these additional costs or retain eligibility for tax benefits.

How QCDs Lower Taxable RMDs

For example, consider a retiree with a $40,000 required minimum distribution. If they donate $10,000 directly to charity using a QCD, only $30,000 remains taxable. This not only lowers reported income but may also help avoid income-based penalties.

Key QCD Rules and Requirements

To make the most of QCDs, it’s important to follow these rules:

• The donor must be at least 70½ at the time of distribution.
• Donations must go to qualified public charities. Exclusions include: donor-advised funds, or gifts involving personal benefit (e.g., gala tickets).
• Funds must transfer directly from the IRA to the charity. A check written to the IRA owner is not acceptable unless payable to the charity.
• The donation must be completed by December 31st to count for that tax year.
• As with all charitable donations of $250 or more, donors must obtain a written acknowledgment confirming that no goods or services were received in return.

Do QCDs Before Other Withdrawals

The IRS counts the first dollars withdrawn from an IRA toward your required minimum distribution. If you take your full RMD before making a QCD, the QCD will still be valid but won’t reduce the taxable portion. To maximize benefits, complete QCDs before taking other withdrawals.

Different Ways to Give

There are several ways to process a QCD:

• Ask the IRA custodian to send a check directly to the charity.
• Receive a check payable to the charity and deliver it yourself.
• Use an IRA-provided checkbook to write QCD checks directly. In all cases, the funds must be payable to the charity, not the account owner.

New IRS Reporting Guidance

Previously, QCDs were lumped in with regular IRA distributions on IRS Form 1099-R, which led to confusion and missed tax benefits.

Starting with the 2025 tax year, the IRS has directed IRA custodians to report QCDs separately using a new Code Y on Form 1099-R. This change should reduce filing errors—but implementation may be delayed until 2026 to allow time for system updates.

Ensure Accurate Reporting

Because QCDs are still included in Form 1099-R totals, donors sometimes forget to subtract them when filing and lose the benefit. Careful recordkeeping and attention to reporting are critical to ensure the tax savings are captured.

Planning Ahead

For retirees looking to support causes they care about while reducing taxable income, QCDs remain a highly effective and strategic giving tool. With the new tax law changes and forthcoming deduction limitations, QCDs are likely to play an even larger role in tax planning, especially if taxpayers were planning anyway on making that charitable contribution.

LMC continues to monitor these developments to help clients make informed charitable and retirement planning decisions. If you have questions related to QCDs or personal tax planning, please reach out to your LMC professional.