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How to Use Qualified Charitable Distributions to Achieve a Win-Win

J Terwilliger 2014
James P. Terwilliger, PhD, CFP®
Senior Vice President, Senior Planning Advisor
[email protected]
(585) 419-0670 x50630

Published on November 12, 2019 in the Rochester Business Journal

On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015. One provision benefitting seniors that was made “permanent” is the Qualified Charitable Distribution (QCD). I say permanent with tongue-in-cheek, of course, since very little Congress does can ever be considered permanent, particularly when it comes to tax legislation.

Quite simply, this provision allows a taxpayer age 70-1/2 and older to transfer up to $100K each year directly to one or more 501(c)(3) charities from his/her traditional IRA and not have the distribution included in taxable income.

The most-valuable feature is that Required Minimum Distributions (RMDs) may be used to fund these transfers. This bestows the greatest benefit on folks who do not want or need their RMDs. In this case, such transfers allow both RMD obligations and charitable interests to be satisfied simultaneously in a tax-efficient manner.

Then, less than a year ago, Congress passed sweeping income tax reform legislation that made the QCD even more attractive. While the Tax Cuts and Jobs Act of 2017 benefitted more than 80% of taxpayers across the entire income spectrum, it reduced tax benefits associated with charitable giving for many taxpayers.

How so? Primarily by capping the local/state tax itemized deductions at $10,000, eliminating miscellaneous itemized deductions, and setting the threshold for deducting out-of-pocket medical expenses at 10% of Adjusted Gross Income (AGI).

Couple the above with almost a doubling of the standard deduction ($27,000 in 2019 for a married couple age 65 or older). It now may require $10,000-$15,000 or more of charitable contributions just to deduct that next contribution dollar. This makes the standard deduction a better deal for most folks, particularly seniors. But if taken, charitable gifts receive no tax deduction and, hence, drive no tax decrease.

Enter the Qualified Charitable Distribution.

For taxpayers who do not want/need their RMDs and are charitably inclined, giving part or all of their RMDs via transfers from IRAs reduces an otherwise-higher taxable income and AGI dollar-for-dollar.

Reducing taxable income as a result of a QCD reduces the tax bill. But what about AGI? Why is it a benefit to minimize AGI?

  • Medicare Part B premiums are greatly impacted by AGI. In 2019, per-person premiums start at a base of $135.50/month for modified AGIs (AGI plus tax-exempt income) up to $85,000 for single taxpayers or up to $170,000 for married filing jointly. At the other end of the scale, for modified AGIs exceeding $500,000 single or $750,000 married, the Part B per-person premium jumps to $460.50/month with an additional Part D surcharge of $77.40/month thrown in for good measure! In between, there are four additional tiers of Part B premiums and Part D adjustments tied to modified AGIs.
  • Taxation of Social Security benefits is impacted by income (defined as “combined income” which is equal to AGI without Social Security plus tax-exempt interest income plus ½ of the Social Security benefit). The portion of benefits that is taxable increases from zero to a maximum of 85%. The max is reached when combined income exceeds $34,000 for single taxpayers and $44,000 for married filing jointly.
  • Exposure to the 3.8% Medicare tax on net investment income is impacted by income. Here, the tax is 3.8% times the lesser of 1) net investment income or 2) AGI less $200,000 for single taxpayers or less $250,000 for married filing jointly. While net investment income itself does not include IRA distributions, taxable IRA distributions are included in AGI, which can mean the difference between being in 3.8% tax territory or not.

Some additional characteristics of QCDs are:

  • Since a QCD is not taxable, charitable gifts made in this manner cannot also be listed as itemized deductions. No double dipping is allowed.
  • QCDs can be used with inherited IRAs for which annual RMDs must start in the year following the original IRA owner’s death.
  • QCDs are exempt from the rule that charitable deductions for cash gifts cannot exceed 60% of AGI in the year of the gift.
  • The maximum QCD is $100,000 per taxpayer per calendar tax year, not limited by AGI or RMD.

Some watch-outs include:

  • QCDs are not allowed for gifts to donor-advised funds or private foundations.
  • QCDs are not allowed from employer retirement plans such as 401(k)s.
  • You must be age 70-1/2 or older to initiate a QCD. It is not enough to turn age 70-1/2 later in the year.
  • If intending to offset RMDs, be sure to distribute QCDs first in any one year. First dollars out of an IRA each year are RMD dollars. RMD distributions cannot be reversed.
  • Since only pre-tax dollars can be used for a QCD, a Roth IRA is not a suitable QCD source.
  • It is the taxpayer’s responsibility to report QCDs to the IRS on the tax return. The annual Form 1099-R from the IRA administrator does not specify whether an IRA distribution is a QCD or not.

QCDs are indeed a win-win for senior taxpayers and for charities. Proper and optimal use of QCDs requires careful planning. Be sure to consult with your financial planner and tax professional to make the best use of this attractive charitable-giving option. 


This material is provided for general information purposes only. Past performance is not indicative of future investment results. Any investment involves potential risk, including potential loss of capital. Before making any investment decision, please consult your legal, tax and financial advisors. Non-deposit investment products are not bank deposits and are not insured or guaranteed by Canandaigua National Bank & Trust or its affiliates, or any federal or state government or agency and are subject to investment risks, including possible loss of principal amount invested.