Tax Planning Strategy to Consider: Qualified Charitable Distributions
If you’ve reached the age where you must take required minimum distributions (RMDs) from your IRAs and don’t need the extra income, making qualified charitable distributions (QCDs) might be a tax-smart move. Briefly stated, this special tax provision allows an eligible senior to transfer funds directly from a traditional IRA to a charity without any adverse tax consequences. The SECURE 2.0 Act enhanced the benefits of QCDs, starting in 2023.
RMD Basics
Traditional IRA funds grow tax-deferred until you make withdrawals. But the money can’t stay in your account forever. You must begin taking RMDs from traditional IRAs after you reach a specified age. RMDs are based on life expectancy tables and your account value on December 31 of the prior year. For instance, RMDs for 2025 are based on retirement plan account values on December 31, 2024.
For decades, the required beginning date for RMDs was April 1 of the year after the year you reached age 70½. But the SECURE Act of 2019 increased the age threshold for the required beginning date to age 72. And then, starting in 2023, SECURE 2.0 bumped up the required beginning date to age 73. (It’s scheduled to increase to age 75 in 2033.)
Certain RMD rules also apply to beneficiaries who inherit traditional IRAs. Mandatory distributions aren’t required for participants in Roth IRAs, but Roth IRA beneficiaries must also empty out their accounts under special rules.
Normally, distributions from a traditional IRA are taxed at ordinary federal income tax rates (currently topping out at 37%). The distributions may also result in net investment income tax complications. Therefore, seniors who don’t need the money often choose to postpone RMDs for as long as possible, subject to certain restrictions. As with Roth IRAs, beneficiaries of inherited traditional IRAs must take RMDs over a certain amount of time under special rules.
Warning: Don’t Overlook RMDs
What happens if you fail to take required minimum distributions (RMDs) in a timely fashion? Under prior law, the penalty was equal to a staggering 50% of the amount required to be withdrawn (or the difference between the required amount and any lesser amount actually withdrawn).
However, under the SECURE 2.0 Act, the penalty was cut in half to 25% of the shortfall, starting in 2023. The penalty is reduced to 10% if you don’t take an RMD but correct your error promptly. While this penalty has been significantly reduced under current law, failure to take timely RMDs can still be a costly mistake.
The QCD Option
Of course, people who itemize can deduct IRA distributions donated to charitable organizations if they receive them and then donate to charity. However, due to a combination of tax law changes under the Tax Cuts and Jobs Act (TCJA), fewer taxpayers are itemizing today than before the law went into effect. Most of the relevant TCJA changes are effective for 2018 through 2025. The standard deduction for single filers is $15,000 for 2025 (up from $14,600 for 2024). The standard deduction for married people who file jointly is $30,000 for 2025 (up from $29,200 for 2024). If the amount of your itemized deductions (including mortgage interest) is less than the applicable standard deduction amount, you normally wouldn’t itemize.
Regardless of whether you itemize or take the standard deduction, you may still intend to donate money to charity from your available resources, including personal and financial accounts. Fortunately, the tax law carves out a special exception for QCDs made from an IRA directly to a charity. These transfers must be arranged through your IRA custodian.
If the transfer meets certain requirements, it’s not treated as a taxable distribution subject to federal income tax. However, if you itemize, you also can’t deduct the charitable donation. The IRS treats it as a virtual “wash.”
Best of all, QCDs count for RMD purposes. Therefore, once you figure out your annual RMD, you can donate that amount to charity without paying tax on the distribution. Of course, if your RMDs exceed the amount you contribute, you’ll owe ordinary income tax on the difference.
To qualify for this favorable tax treatment, you must be at least 70½ years old at the time of the transfer. In addition, the maximum annual QCD is $100,000 per taxpayer. The annual limit doubles to $200,000 for married couples who file jointly if each spouse separately qualifies.
Important: Certain charities — including donor-advised funds, private foundations and supporting organizations — aren’t eligible for QCDs.
SECURE 2.0 Enhancements
SECURE 2.0 adds the following two favorable changes to the QCD rules:
- The annual limit on the QCD amount is now indexed for inflation. It’s $108,000 per qualified individual for 2025 (up from $105,000 for 2024). So, the maximum contribution for a married couple is $216,000 for 2025 (up from $210,000 for 2024). Under prior law, the $100,000 limit wasn’t indexed for inflation.
- A qualified individual may now elect to make a one-time gift of up to $50,000 to a charitable remainder trust (CRT) or charitable gift annuity (CGA). This figure is now indexed annually for inflation. The inflation-adjusted figure is $54,000 for 2025 (up from $53,000 for 2024).
The CRT can be a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT). With a CRAT, the payment must be a fixed amount at least equal to 5% of the initial value of the trust property. In contrast, a CRUT requires payment of a fixed percentage (not less than 5%) of trust assets. Whether you use a CRAT or a CRUT, the trust manages the assets and pays annual income to you or another designated beneficiary. The charity receives the remaining assets when the trust term ends.
A CGA is a similar arrangement where you make a sizeable gift to a charity and designate a beneficiary to receive a stream of income during their lifetime or a term based on your age and life expectancy. The donor may be the annuity recipient. The charity receives the remaining assets when you die or the trust term ends.
Under this “split-gift technique,” up to 90% of the transferred value — or a maximum of $48,600 in 2025 — can be paid out to the IRA owner over a term of no more than 20 years or for life. You can obtain more detailed information on using a CRT or a CGA from the sponsoring charitable organization.
Important: The age threshold for QCDs has remained at 70½ while the required beginning date for RMDs has increased to age 73. For those in their seventies who still aren’t required to take RMDs, you can simply transfer IRA funds to charity without paying any tax.
Other Considerations
A QCD reduces your adjusted gross income for various other tax purposes. This may have a domino effect on the rest of your tax return, including your deductions, credits and alternative minimum tax liability.
Also, Social Security benefits may be subject to tax under a complex formula. A QCD enables you to effectively lower your income for this calculation, thereby potentially reducing another tax liability.
For More Information
The QCD strategy isn’t right for everyone who qualifies for it. Discuss the pros and cons with your tax and financial advisors to determine whether this tax planning tool makes sense for your situation.
Copyright 2025
This article appeared in Walz Group’s April 21, 2025 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.
