QCDs Can Be a Tax-Savvy Move for Seniors

For some time now, individuals age 70½ and older have been able to transfer funds directly from a traditional IRA to an IRS-approved charity. However, with the enactment of the One Big Beautiful Bill Act (OBBBA) earlier this year, these qualified charitable distributions (QCDs) have become an even tax-savvier way to give to charity. If you're interested in this strategy, here's what you need to know.

Basic Requirements

QCDs are taken out of your traditional IRA(s) free of federal income tax. In contrast, other traditional IRA distributions are wholly or partially taxable, depending on whether you've made any nondeductible contributions over the years.

You can't claim itemized deductions for QCDs, but their tax-free treatment equates to a 100% deduction because you'll never be taxed on those amounts. In addition, QCDs count toward required minimum distributions (RMDs), if applicable. (See "The Relationship Between QCDs and the RMD Rules" below for more details.)

To be a QCD, an IRA distribution must meet the following four requirements:

1. It must be made after age 70½ (whether you're the original owner or you inherited the IRA).
2. It must meet the tax-law requirements for a 100% deductible charitable donation. (If you receive any benefits from the charity that would be subtracted from a donation under the normal charitable deduction rules, the distribution can't be a QCD.)
3. It must be a distribution that would otherwise be taxable.
4. It must be paid directly by an IRA trustee to a qualifying charity. Donor-advised funds and most private foundations are ineligible.

Important: There's an annual inflation-adjusted limit on total QCDs that you can take in any one year. For 2025, the limit is $108,000. If both you and your spouse have IRAs set up in your respective names, you're both entitled to separate $108,000 limits.

Multiple Benefits

QCDs offer several tax-saving advantages. First, they generally aren't subject to the various limitations that apply to itemized charitable deductions. Second, in addition to not being included in your taxable income, they're not included in your adjusted gross income (AGI) or modified adjusted gross income (MAGI). Among other benefits, this lowers the odds that you'll be affected by income-based phaseouts and reductions of various tax breaks, including some new ones added by the OBBBA. Specifically, QCDs can help you avoid (or minimize the impact of):

A higher tax bracket. Traditional IRA distributions add to your taxable income and can push you into a higher tax bracket.

The AGI ceiling on charitable deductions. Your total itemized deductions for cash contributions to public charities are limited to 60% of your AGI.

The new floor on charitable deductions. Starting in 2026, the OBBBA reduces your otherwise allowable itemized charitable deduction by 0.5% of your AGI.

The new itemized deduction reduction. Starting in 2026, taxpayers in the highest federal income tax bracket (37%) will see the value of their itemized deductions reduced. Under the new rule, each dollar of deduction will generally lower their federal tax bills by 35 cents instead of 37 cents.

The phaseout of the new "senior" deduction. For tax years 2025 through 2028, the OBBBA allows individuals age 65 and older to claim a deduction of up to $6,000, subject to an income-based phaseout. This deduction is available whether or not you itemize. But the senior deduction begins to phase out when modified MAGI exceeds $75,000 for single filers or $150,000 for married couples filing jointly.

The reduction of the deduction limit for state and local taxes (SALT). For tax years 2025 through 2029, the OBBBA increases the SALT deduction limit to $40,000 per return ($20,000 per return for separate filers) — with 1% annual inflation adjustments to those limits going forward. However, for 2025, the SALT deduction limit is reduced for taxpayers with MAGI above $500,000 ($250,000 for separate filers). If your MAGI exceeds the appliable threshold, your SALT deduction limit is reduced by 30% of the amount your MAGI exceeds the threshold, though your deduction can't fall below $10,000 ($5,000 for separate filers).

The phaseout of other tax breaks. Here are some other tax breaks subject to income-based phaseouts:

• Education tax credits,
• The student loan interest expense deduction,
• The new OBBBA deduction for car loan interest, and
• The deduction for qualified business income.

This isn't an exhaustive list. Your tax advisor can provide more information on income-based phaseouts.

Medicare health insurance surcharges. The monthly premium for Medicare Part B coverage for the current year depends on your MAGI from two years earlier. Higher-income individuals must pay a monthly surcharge in addition to the base premium. Formally, the surcharge is called the Income-Related Monthly Adjustment Amount (IRMAA).

For 2025, IRMAA surcharges apply if you: 1) filed as an unmarried individual for 2023 and reported MAGI for the year that exceeded $106,000, or 2) filed jointly for 2023 and reported MAGI for the year that exceeded $212,000. Your 2025 MAGI could cause you to be hit with an IRMAA surcharge — or a bigger surcharge — in 2027.

The 3.8% net investment income tax (NIIT). Capital gains, dividends and interest count as investment income and can be subject to the NIIT. You may be exposed to the NIIT if your MAGI exceeds:

• $200,000 if you're a single filer,
• $250,000 if you're married and file jointly, and
• $125,000 if you're married and file separately.

The amount subject to the NIIT is the lesser of 1) your net investment income, or 2) the amount by which your MAGI exceeds the applicable threshold. Although IRA distributions themselves aren't subject to the NIIT, they can trigger the NIIT on investment income if they cause your MAGI to exceed the applicable NIIT threshold.

Additional Tax Advantages

There are two other tax benefits to consider when deciding whether to take QCDs:

1. QCDs come from the "taxable layer" of your IRA. Say you own one or more traditional IRAs to which you have made nondeductible contributions over the years. Each IRA balance consists partly of a taxable layer (from deductible contributions and account earnings) and partly of a nontaxable layer (from nondeductible contributions). QCDs are treated as originating from the taxable layer, even though they're tax-free. Nontaxable amounts are left behind in your account(s). Later on, you or your heirs can withdraw those amounts tax-free.

2. QCDs reduce your taxable estate. However, this isn't a big issue for most families these days given that the 2025 federal estate tax exemption is set at a whopping $13.99 million, or effectively $27.98 million for married couples.

Potential Pitfall

You can make IRA contributions after reaching age 70½ as long as you have sufficient earned income. However, if you make deductible IRA contributions after age 70½, the amount of tax-free QCDs you can take is reduced by the excess of the aggregate amount of deductible IRA contributions made after that age for the current year or any previous year.

For example, let's say Jack turned 70½ in 2024. He has one IRA and has never made any nondeductible contributions. In 2025, he makes a $7,000 deductible traditional IRA contribution. Also in 2025, Jack makes what he thought was a $10,000 QCD to an IRS-approved charity.

Unfortunately, he wasn't aware of the reduction for deductible IRA contributions. His attempted $10,000 QCD is reduced by the $7,000 deductible IRA contribution. So, Jack actually has a $3,000 QCD for 2025 ($10,000 minus $7,000) and a $7,000 garden-variety IRA distribution ($10,000 minus the $3,000 QCD) that's subject to the normal tax rules for distributions. On the bright side, if Jack itemizes, he can deduct the $7,000 as a 2025 charitable contribution because it went to an IRS-approved charity.

Profile Matches

Assuming you can afford to donate IRA money, you can benefit tax-wise if you match one or more of the following four profiles:

1. You won't itemize deductions because the standard deduction for your filing status is greater than what your total itemized deductions would be. In this case, a "regular" charitable donation won't deliver any tax advantage in 2025 (because you won't be able to deduct it), but a QCD will.
2. You want to reduce the likelihood that you'll be pushed into a higher tax bracket, be subject to income-based tax break reductions and phaseouts, or trigger the NIIT.
3. You want to reduce or eliminate tax on RMDs. (See "The Relationship Between QCDs and the RMD Rules" below.)
4. You're well-off and looking for a quick-and-easy estate tax reduction strategy.

Tax-Smart Opportunity

QCDs can be a tax-smart opportunity for seniors who have discretionary funds in their IRAs and wish to donate to charity. But to determine whether they're right for you, discuss the strategy with your tax advisor.