For IRA owners who are charitably inclined, Qualified Charitable Distributions (QCDs) offer a powerful way to give back while potentially reducing taxable income. With tax season in full swing, it’s especially important to make sure your accountant is aware of any QCDs you’ve made—or, if you prepare your own return, that you report them correctly.
Here’s what you need to know.
What Is a Qualified Charitable Distribution?
A Qualified Charitable Distribution (QCD) allows individuals age 70½ or older to transfer funds directly from their traditional IRA to a qualified charity.
Key benefits include:
- The distribution can count toward your Required Minimum Distribution (RMD).
- The QCD amount is excluded from your taxable income.
- Lower adjusted gross income (AGI) may help reduce:
- Taxation of Social Security benefits
- Medicare premium surcharges (IRMAA)
- Exposure to certain tax phaseouts
Unlike a regular charitable donation, you do not itemize deductions to receive the tax benefit. The exclusion happens before income is calculated—often making it more valuable than a standard charitable deduction.
Important QCD Rules
- You must be 70½ or older at the time of the distribution.
- Funds must go directly from your IRA custodian to the qualified charity.
- The annual QCD limit is set by law and is currently up to $111,000 per individual for 2026.
- QCDs cannot be made from active SEP or SIMPLE IRAs.
- The charity must be a qualified 501(c)(3) organization (donor-advised funds and private foundations do not qualify).
A Critical Tax Reminder: Inform Your Accountant
One of the most common issues with QCDs is improper tax reporting as custodians have not been required to report the QCD amount separately from other taxable distributions. However, in 2025, the IRS issued a new code to deal with this issue..
What’s New
Starting with the filing of 2025 taxes, the IRS has introduced a new Code Y on Form 1099-R specifically to identify QCDs. However, this code is optional for 2025 filing, meaning:
- Some custodians may use Code Y to identify your QCD
- Others may not use the code at all
- Either approach is acceptable under current IRS guidance
Why This Matters
Your IRA custodian will issue a Form 1099-R reporting the total gross distribution for the year. Whether or not Code Y appears, it remains your responsibility to inform your tax preparer about QCDs.
Here’s the problem:
Since adopting Code Y is optional, it is likely that the 1099-R may not clearly separate QCD amounts from other distributions. If you don’t communicate with your accountant that you made a QCD in 2025, the full amount may be reported as taxable income.
Example:
- Total IRA distributions: $40,000
- QCDs sent directly to charities: $15,000
- True taxable amount: $25,000
If your accountant isn’t told about the $15,000 QCD, your tax return could mistakenly show $40,000 as taxable—regardless of whether Code Y appears on your 1099-R.
If You Do Your Own Taxes
If you prepare your own return, you must properly report the QCD:
- Enter the full amount from Form 1099-R on the IRA distribution line.
- Enter the taxable amount reduced by the QCD.
- Write “QCD” next to the line to indicate the exclusion.
Using the example above:
- Line for IRA distributions: $40,000
- Taxable amount: $25,000
- Notation: “QCD”
Be sure to retain:
- The acknowledgment letter from the charity.
- Documentation showing the transfer was made directly from your IRA.
Why Proper Reporting Matters
Failing to report a QCD correctly can:
- Increase taxable income
- Trigger higher Medicare premiums
- Increase taxation of Social Security benefits
- Reduce eligibility for certain credits or deductions
Because QCDs reduce your AGI rather than creating an itemized deduction, the tax benefit can be broader and more impactful.
Final Thoughts
Qualified Charitable Distributions are one of the most tax-efficient strategies available to IRA owners who are charitably inclined. But the tax benefit only works if reported correctly.
As tax season approaches:
- Inform your accountant of the exact amount of QCDs made
- Provide documentation
- Review your tax return to confirm the taxable amount was reduced
A simple conversation can prevent costly tax mistakes and ensure you receive the full benefit of your generosity.
Need help optimizing your retirement income and charitable giving strategy? Our team at HBKS Wealth Advisors can help you coordinate QCDs with your overall tax and financial planning. Schedule a consultation today to ensure you’re making the most of every giving opportunity.
Important Disclosure:
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
HBKS Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.
The historical and current information as to rules, laws, guidelines, or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified but was obtained from sources believed to be reliable. HBKS Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.
Investment Advisory Services offered through HBK Sorce Advisory LLC, d.b.a. HBKS Wealth Advisors. Not FDIC Insured – Not Bank Guaranteed – May Lose Value, Including Loss of Principal – Not Insured By Any State or Federal Agency.
