What is a qualified charitable distribution? Get a tax benefit for small donations

U.S. tax laws don’t favor those contributing small amounts of money to charity, but there’s a way around that if you’re taking IRA withdrawals. It’s called a qualified charitable distribution, and it allows you to receive a tax benefit even if your donation is tiny. Here’s how it works.

What is a qualified charitable distribution?

A qualified charitable distribution (QCD) is a direct transfer of stock or cash from an eligible IRA to a qualifying charity. When you make a QCD, the distribution is excluded from your taxable income, unlike a typical IRA withdrawal. The donation may keep you in a lower tax bracket, and it can be counted toward your IRA’s required minimum distribution (RMD) for that tax year.

To sum that up, a QCD offers these benefits:

• The ability to get a tax benefit from your charitable giving

• The ability to satisfy your minimum distribution requirement for a given tax year, if any

• The ability to stay in a lower tax bracket, which may help you keep taxes on your Social Security lower.

Without the QCD you can still contribute to charity, but you might not get the tax break that you could otherwise. If you’re able to itemize your tax return – just 10 percent of American filers do, following the 2017 Jobs and Tax Cut Act – you may be able to recognize all or a portion of any donation. But smaller donations won’t reach the threshold where it makes sense– the standard deduction is $14,600 in 2024 – meaning donors will miss the tax benefit unless they use a QCD.

For example, if you give $500 or $1,000 to charity in a year, you might not get to count that donation as a deduction on your tax return. But if you must take RMDs from your IRA, then you can use a qualified charitable distribution and effectively derive multiple benefits.

How qualified charitable distributions work

Donors will want to pay particular attention to the rules surrounding QCDs, since they can be strict.

You’ll need to abide by the following rules to be sure your donation qualifies:

• Only some types of IRAs qualify. Traditional IRAs, rollover traditional IRAs, inherited IRAs, inactive SEP IRAs and inactive SIMPLE IRAs can all use a QCD. In some cases, Roth IRAs may make QCDs, too.

• You must be old enough. Donors must be at least 70 ½ when they make the QCD. That differs from some other IRS requirements, where an IRA owner must turn a specific age during the tax year to claim a specific benefit, so watch out.

• Your QCD benefit is capped each year. The QCD benefit is capped at $105,000 in 2024, though it’s indexed to inflation each year, so it will rise over time. That’s the maximum annual QCD an individual can claim across all their charitable donations.

• A spouse can also claim the benefit. Individuals face a cap on the QCD, but a spouse can also donate and claim the QCD benefit, effectively doubling a household’s capability, as long as the spouse also qualifies under the rules.

• QCDs can count toward RMDs once you’re 73 or older. A QCD counts toward your required minimum distribution only if you must take that distribution. RMDs apply to those who are 73 and older.

• You must donate by your RMD deadline, if you want to claim RMD credit. If you’re looking to count the QCD toward your RMD for that year, you’ll need to complete the transfer by your RMD deadline, typically December 31 of the year you want to claim it.

• QCDs won’t appear as charitable gifts on your tax return. A QCD will not appear as a charitable deduction on Schedule A, as a typical gift would. You’ll still need a statement from the charity before filing your return, however.

• Not all charities may qualify. The charity must be a 501(c)(3) organization, so you’ll want to clarify everything before you make your donation.

The IRA provider will send a tax statement of the distribution on Form 1099-R, typically in the January following the year of the distribution, as they would for any other. Taxpayers must then claim the distribution is a QCD on their tax return on Line 4 of Form 1040 or Form 1040-SR.

What to watch out for with QCDs

The QCD offers an effective way to get a benefit for a donation from an IRA, but you’ll want to pay attention so that you avoid accidentally messing it up:

• Donate directly to the charity. If you transfer the money from your IRA to your own account – even if you subsequently give it to the charity – you’ll disqualify the gift from counting as a QCD.

• Contact the charity to make sure it qualifies and to get instructions. Before you make your donation, connect with the charity to be sure that it accepts QCDs and has a way to verify your giving. You’ll want to be sure that you’re following their procedures – as well as the IRS’s, of course – to take advantage of the QCD.

It’s vital to make sure you stick close to the rules for QCDs so that you’re able to take advantage of the benefit. If not, you can take a distribution, be unable to claim a tax benefit and then get hit with tax on the distribution.

Bottom line

A qualified charitable distribution offers a way for even small donations to count toward your tax bill. So if you’re looking to give, consider using your IRA in place of giving from other accounts. You’ll get a tax benefit from your charitable impulse, making the benefit just a bit sweeter.