Maximize Tax Benefits with a Qualified Charitable Distribution 

If you’re aged 70 ½ and older with an individual retirement account (IRA), a qualified charitable distribution (QCD) may be a way to help you achieve your charitable goals while also saving you money on taxes. By donating some of your IRA funds directly to an eligible public charity, you can potentially enjoy tax benefits as well as have the transfer count towards your required minimum distribution (RMD) for the year. Incorporating a QCD into your tax and RMD strategies could be a valuable part of your overall financial plan. 

Understanding the QCD basics 

The maximum annual limit for a QCD in 2025 is $108,000, which is typically adjusted for inflation each year. At the time of the direct transfer from your IRA, you must be aged 70 ½ or older, though age alone doesn’t guarantee that you qualify to take a QCD. If you’ve reached the age of RMDs, which is 73, the QCD could count towards your RMD amount. Traditional IRAs and inherited traditional IRAs (if the beneficiary-owner is at least 70 ½) are commonly used accounts for a QCD. SEP IRA and SIMPLE IRA are also eligible if the plan is no longer active and receiving employer contributions. Some charitable deductions under the normal tax rules are not allowable under the rules for a QCD, including a donor advised fund (DAF), private foundation, and “supporting organization” as defined in the tax code.¹ 

Exploring the tax benefit 

Charitable contributions are typically an itemized deduction in Schedule A of an income tax return.²  You can usually claim the higher of either the allowable standard deduction or your total itemized deductions, which might include medical expenses, home mortgage interest, and charitable donations. With the passage of the Tax Cuts and Jobs Act of 2017, the standard deduction amount practically doubled while the number of allowable itemized deductions shrank, making it much more difficult to reap a tax benefit by giving. Additionally, itemized charitable deductions are generally limited to 30% or 50% of the taxpayer’s adjusted gross income (AGI), which may limit the tax benefit in a given year. 

With a QCD, however, it’s possible to save on taxes even without itemizing deductions — unlike regular distributions from an IRA which are generally treated as ordinary income for tax purposes. By taking a QCD deduction when calculating your AGI, you can benefit regardless of your itemized deductions. Keep in mind that since you’re getting the benefit of a tax-free distribution, you won’t be able to include the donation as an itemized deduction. 

Initiating a QCD transfer 

Most brokerage firms that offer IRAs can establish a QCD. Transfers can usually be set up electronically through the firm’s website. You can choose to make a one-time distribution or schedule transfers over a period of time (such as monthly). Some firms have check-writing privileges with a customer account, including an IRA but the distribution check must be payable to a charity and not to you or it will not count as a QCD and will be subject to income tax. To count against your current-year RMD, a distribution check must be cashed by the charity before year-end so consider sending the check no later than early December. 

Following the first-dollars-out rule  

Tax rules state that the first dollars withdrawn from an IRA in a year when the taxpayer has an RMD due will go to satisfy the RMD. This is an important distinction if you want to utilize a QCD to satisfy some or all of your RMD for the year. To get the full tax benefit, it’s generally a good idea to make any distribution for the year as a QCD before taking a distribution for yourself. 

Example: Jennifer has an RMD of $10,000 for the year. In January, she takes $6,000 to cover a medical emergency that occurred in December. Later in the year, she donates $10,000 as a QCD to her favorite charity. Since $6,000 of her RMD has already been spent, only $4,000 (the remaining RMD amount) of the QCD counts against the year’s RMD. 

Treating a QCD in a tax return properly 

If you perform a QCD transaction, it’s imperative that you maintain records of when the distribution occurred and the name of the recipient charity. The firm where you have your IRA will issue a Form 1099-R early in the following year that states the total amount distributed from the IRA without mention of the QCD. It’s entirely your responsibility to correctly file Form 1040 indicating the total distribution, per the 1099-R, in line 4a. Line 4b should include the total distribution less any amount attributed to the QCD or distributed from the IRA. In addition, the acronym “QCD” should appear next to line 4b. 

Being careful with QCD and state tax credits 

While a well-timed QCD can help with federal income tax, many states also provide tax credits for charitable donations made to qualifying charities that support residents, organizations, or interests of that state. For example, Arizona provides an income tax credit (up to $987 for married filing jointly in 2025) for donations to a qualifying charitable organization that aids Arizona residents who receive Temporary Assistance for Needy Families (TANF) benefits, are low income, or have a chronic illness or physical disability.³  Taxpayers claim the credit on their state income tax return in the year of the donation. While federal and state laws generally favor charities, figuring out how to donate can be complicated. 

Receiving both a federal tax deduction and a state tax credit might be enticing, but it can create the unintended consequence of disallowing some or all of the charitable deduction. For example, a charitable deduction disallowance can happen when the charity provides a benefit in return, such as a paid membership, discounts for event tickets, and silent auction items including trips or merchandise. In these situations, the donation amount over and above the value of the benefit qualifies as a charitable deduction for standard donations. 

Example: James donates $1,000 to his college and receives a $300 reduction in the price of sports tickets for the season. James would be allowed an itemized deduction of $700 in the year the gift was made. 

For a QCD, any disallowed federal deduction will lead to the loss of QCD treatment for the entire gift. Under IRS regulations finalized in 2019, the value of any state income tax credit received in connection with a charitable donation is treated as an economic benefit to the taxpayer. Therefore, you’d be required to reduce the deductible amount of your donation.  

Example: James’ older brother Tom donates $1,000 directly from his IRA to his college in what could be an allowable QCD transaction except that he receives a $300 reduction in the price of sports tickets for the season. Because he received a benefit, it invalidates the entire QCD transaction and causes the $1,000 to become taxable income for Tom, who is allowed a $700 itemized deduction. 

The rules do provide relief for state tax credits of 15% or less and the full amount of a donation will qualify as deductible at the federal level. In other words, a QCD is allowed as long as the value of the state tax credit is no more than 15% of the value of the QCD. State income tax deductions, even up to 100% of the donated amount, qualify as deductible at the federal level as well. 

Considering QCDs  

If you’re aged 70 ½ and older and have a qualifying IRA, a QCD can make sense for fulfilling an RMD requirement while using a tax-advantaged way of giving to a charity of choice. Whether it’s right for you depends on many factors — that’s why it’s important to work with your wealth advisor to develop the right approach for your needs. Moreover, tax laws are complex and can change each year. 

At Mercer Advisors, we connect the dots of your financial life by unifying financial planning, investment management, tax, estate, insurance, and more. Our specialists can guide you on decisions related to IRAs, QCDs, taxes, and more. Not a client? Let’s talk. 

¹  “Give more, tax free.” IRS, 14 Nov. 2024. 
²  “Charitable contribution deductions.” IRS, 20 Aug. 2024.  
³  “Credits for Contributions to QCOs and QFCOs.” Arizona Dept. of Revenue, 26 Jan. 2024.