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SOME 90% OF TAXPAYERS claim the standard deduction on their tax return. Thanks to 2017’s Tax Cuts and Jobs Act, today’s standard deduction is larger than the itemized deductions of most taxpayers, including those who previously itemized.
But my wife and I are among the 10% of taxpayers who have continued to itemize, including each of the five years since I retired in 2018. Despite the much higher standard deduction for married couples over age 65, we still had enough itemized deductions to make it worthwhile.
But that changed in 2023.
Prior to 2023, about half of our itemized deductions were charitable contributions. When I turned age 70½ last year, I became eligible to make qualified charitable distributions (QCDs) from my IRA, and started going that route instead of donating directly to charitable organizations.
If you aren’t familiar with QCDs, they’re tax-free withdrawals from a traditional or Roth IRA—401(k)s don’t qualify—that are sent directly from the IRA custodian to a qualified 501(c)(3) charity. Not only is the withdrawal not taxed, but you can use it to help meet your required minimum distributions, which now kick in at age 73.
I’ve been looking forward to doing the taxes this year to see how my QCDs would affect them. I know that sounds a little ridiculous. Who likes to do their taxes? Maybe only personal finance nerds who write for HumbleDollar.
Since I use Intuit’s TurboTax software to do our taxes, all I needed to know to get started was our income, the tax withheld and an accounting of all my QCDs. Because I have all my retirement accounts consolidated at Fidelity Investments, I get one statement detailing all my IRA distributions and withholding information.
When I’ve itemized in the past, I had to gather a lot of additional documentation on our deductions, including charitable contributions, property taxes, medical expenses and so forth. Once I had all the information, I’d enter it into TurboTax. But since we’ll be taking the standard deduction in 2023, I didn’t need to compile all that information to get started on our taxes.
Our 2023 income came mostly from taxable IRA distributions. A close second was our Social Security benefits, 85% of which is taxable at our income level. We also had a small amount of interest from a savings account, plus some business income from book sales and a speaking engagement.
As you probably know, taxable income all starts with your adjusted gross income (AGI). According to the IRS, AGI “is defined as total income minus deductions or ‘adjustments’ to income that you are entitled to take.” But things get a little tricky when it comes to accounting for QCDs.
Your custodian reports QCDs and other distributions from an IRA on IRS Form 1099-R. They’re included with taxable distributions and reported on Lines 1 and 2 of Form 1099-R.
But there’s a problem: Nowhere on the 1099-R is the QCD amount reported. You also won’t find a box or a code on Form 1040. You’ll have to do this AGI adjustment yourself. Fortunately, it’s easy. You just have to do some simple math and fill out two fields on Form 1040.
Here’s a simple example: If you withdrew $25,000 from your IRA, of which $5,000 went directly to charity using a QCD, you’d take the gross distribution listed on Form 1099-R’s Box 1 and enter it on Line 4a of Form 1040 (IRA distributions). Then you’d subtract the $5,000 QCD and enter $20,000 on Line 4b (taxable amount). If the entire distribution is a QCD, you would enter $0 on line 4b. If you’re using a paper form, you can write “QCD” next to line 4b. For more details, see the instructions for 2023’s Form 1040.
Since I use TurboTax software, I didn’t have to worry about this. I was pleasantly surprised that TurboTax asked about QCDs and did the calculation for me. All I had to do was enter the total of my QCDs for the year.
If someone does your taxes for you, and you give them your 1099s and charitable contribution statements, the preparer won’t automatically know about your QCDs. You’ll need to tell the preparer, and include the amount, so it gets reported correctly.
Keep in mind that your only proof of the QCDs is a statement from a qualified charity acknowledging that it received the IRA funds. If you’re ever questioned or audited, you’ll need this, along with your financial institution’s records of the QCD amounts.
Once I entered all the information, TurboTax calculated our AGI by reducing our gross income by the total amount of my QCDs. The software treats it as a “pre-tax deduction,” like a contribution to a traditional IRA. Next, the software calculated our taxable income by reducing our AGI by the standard deduction amount for a married couple over age 65 filing jointly, which for 2023 is $30,700.
The resulting taxable income put us in the 22% marginal tax bracket, but our effective tax rate was 8.1% because most of our income was taxed at a lower rate than our marginal rate. Did doing QCDs help or hurt our overall tax position? The short answer: It helped. The longer answer requires some qualification.
Because we already realized some tax benefits from our itemized charitable contributions, it didn’t help as much as if we’d previously been taking the standard deduction and started making QCDs for the first time.
By using QCDs for the 2023 tax year, we reduced our overall tax liability, compared to what it would have been if we’d itemized our charitable contributions. The reason is that the total of our standard deduction and the qualified charitable distributions (QCDs) exceeded the amount of our itemized deductions, further reducing our taxable income.
To estimate our tax savings, I compared our 2023 standard deduction, combined with my QCDs, to our 2022 itemized deductions, and then calculated the potential tax savings. Since we’re in the 22% marginal tax bracket and QCDs reduced our taxable income by an additional 7.6%, our additional tax savings as a percentage of our taxable income was 1.7% (0.22 x 0.076 = 0.017), a significant but not substantial tax savings.
From this, we can conclude that QCDs may be beneficial in four basic scenarios:
Scenario No. 1: If you itemize your deductions and charitable contributions are a significant part of the total, it’s likely that making QCDs when you’re eligible will result in a slightly lower federal income tax bill.
Scenario No. 2: If you make charitable contributions but weren’t previously able to itemize, making QCDs may lower your taxes even more because you’ll still be able to take the standard deduction, plus you’ll reduce your taxable income by the amount of your QCDs.
Scenario No. 3: If you haven’t been making charitable contributions but would like to start once you reach age 70½, QCDs are a great way to go because your IRA distributions are tax-free whether you’re currently itemizing or not.
Scenario No. 4: If you use QCDs to help satisfy your annual required minimum distributions, you’ll reduce your taxable income by the amount of your QCD.
QCDs helped my wife and me, though the tax savings would have been greater if we hadn’t previously been itemizing our charitable contributions. And they’ll probably help you, too, no matter which of the above scenarios you’re in.
Chris Cagle retired from his career as an IT manager in the financial services industry in 2019. He now spends his time writing on his own site, RetirementStewardship.com, volunteering at his church, and hiking and fishing when he gets the chance. Chris has also written three books on retirement, Reimagine Retirement (2019), The Minister’s Retirement (2020) and his most recent, Redeeming Retirement: A Practical Guide to Catch Up (2021). Chris and his wife have been married 50 years and have six grandchildren. Chris’s previous article was Time for a Ladder.
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One more follow up note about QCD receipt documentation.
This year as we receive receipts for our donations we will carefully check them for each of the required items, especially the “No goods or services were provided in exchange for your contribution” or similar wording needed to assure that, if audited, the donation will remain deductable. If necessary we will request an updated receipt that meets all of the IRS requirements.
My spouse is on the board of a local historical society that operates a museum in an 1860’s Victorian. They are a 501(c)(3). I found that the thank you for your donation letter they were sending did not include the “no goods or services” phrase. I helped my spouse edit the receipt letter so that it now includes all of the necessary information.
I am sure many small 501(c)(3)s are not aware of what must be on the receipt. It is too bad the IRS does not provide a standard receipt format that could be included on the thank you letters.
I also think it odd that the charities tax ID number is not required. Will your donation pass being audited if the charity name on the letter does not exactly match the name used on the charities Form 990?
Great analysis of complex topic. Thank you. I wish more people knew about QCD’s
like you, I look forward to doing my taxes and I use turbo tax which I dislike as a business but love the software.
Thanks, Nick. I’m sure many advisors and CPAs know about them (and I hope they regularly discuss them with their clients). But it points to the value of at least some level of self-education if only to have intelligent conversations with those we consult with.
Great article. I’m surprised at how few people know about QCDs or take advantage of them. At my church, there is only one person doing QCDs, but I would guess that there are 30 to 40 people who probably qualify for them.
I wonder how many people dutifully collect chartible giving receits each year, provide them to a tax preparer, but end up simply using the standard deduction, so they never actually realize their chartible giving is not providing any tax benefit.
Thanks, Church. Several HD readers made similar comments. Since I first learned about them, I have been a “QCD evangelist” at my church. But I sure don’t want to be the “oh no, here comes the QCD guy again” guy LOL. (It’s like the newly minted life insurance salesman, a guy you almost never talk to, who invites you to lunch ostensibly to help you “secure your financial future.”)
So why can’t the IRS just add a box for QCDs on the line for IRA distributions to make it super simple? I plan to use this strategy to make my entire RMD tax free, and use my Roth for all expenses.
That would make something complex just a bit easier.
I think that’s the question every taxpayer who makes QCDs asks when they work on their taxes. I guess nothing is “super simple” when it comes to the IRS.
We’re a few years away from being able to do QCDs, but it’s definitely in the plan. We’re in Scenario 1 now. For us, the biggest incentive is that we’ll have to do RMDs from our retirement account anyway, so we might as well flip some of that money to charity. We’ll be giving to charity with or without QCDs.
Right now we use a Donor Advised Fund with Fidelity to manage our giving, which greatly simplifies things at tax time. We plan to keep giving from that after we retire until we turn 70.5 and then switch to QCDs. I’m not looking forward to the additional paperwork, but you can’t use a DAF to pay the QCDs.
Good plan, Doc. And no, you can’t use a DAF to fund the QCDs (only IRAs), but they have their advantages in addition to those of QCDs.
I really appreciate this article. I am 70 and have always planned to do QCDs when I hit RMD age. For several years now, we have had no income except social security and own no real estate. Even though I have always given 10% of my income to causes near and dear to my heart, the amount was insufficient to itemize (especially since our income is half of what it was!). The standard deduction was our only option.
BUT, fate stepped in and I won nearly $30,000 (video poker) in 2023. I created a DAF with Schwab using the winnings. This allowed me to itemize which ALSO allowed me to deduct gambling losses from wins. This cut our taxes in half. I plan to make our charitable donations of $7-$9K annually via the DAF for the next 3 years. Then I’ll close it out and make QCDs.
You could start your own blog, “The Charitable Gambler.”
As of today the 2023 version of IRS Pub 590-b is still in proof format but that Pub is a great source for taxpayers to review every year if you plan to make a eligible QCD from your tIRA.
I would note the following traps in regard to QCD’s –
From Pub 590-b —
Beginning in tax years after December 31, 2019,the amount of QCDs that you can exclude from income is reduced by the excess of the aggregate amount of IRA contributions you deducted for the taxable year and any prior year that you were age 701/2 or older over the amount of such IRA contributions that were used to reduce the excludable amount of QCDs in all earlier years.
From the IRS Taxpayer Advocate in a plea for legislative relief from strict CWA requirements they described the problem —
To claim a charitable contribution, a taxpayer must obtain a contemporaneous written
acknowledgment (CWA) that states the amount of cash and a description of any property contributed,whether any goods or services were received in exchange, and a description and estimate of the value of any such goods or services. The CWA must be received prior to the date of filing the return or the due date of the return, whichever is earlier. This is a strict requirement with no exceptions. If taxpayers do not obtain a CWA prior to the filing date or due date, they are not eligible for the deduction, even if they made the contribution and can otherwise substantiate it.
Ed Slott and Co in September 2022 also had a article titled QCDs and the Absolute Necessity for a CWA that you can google.
Just when we thought we had everything ready to begin using QCDs.
The Ed Slott article only mentions the “Intangible Religious Benefits Exception” but IRS Pub 1771 lists two more: “Token Exception” and “Membership Benefits Exception”. After reviewing the IRS information multiple times I interpret it to mean that as long as the “goods and services” that may have been provided by the charity to the donor fits into one these three exceptions, the donation receipt (CWA) can state that “No goods or services were provided in exchange for your contribution.” This is for normal monetary donations.
There is a clause that applies when the donor is claiming the donation of “services and unreimbursed expenses”. In this case only the “Intangible Religious Benefits Exception” applies.
Any lawyers or bureaucrats out there disagree?
Chris, thanks for a very helpful article. We’re strongly considering QCDs for our charitable giving but are inclined to wait till I’m 73 when RMDs begin.
I realize you can start making QCDs at age 70 1/2, and that does have the benefit of somewhat reducing your account balance subject to future RMDs.
But the benefit at age 73 of directly subtracting QCDs from current RMDs seems quite a bit more significant. See, e.g., point #3 here: Five tax-savvy charitable giving strategies | TIAA
Am I missing something?
If you were making sporadic charitable contributions, or starting for the first time, then I agree that it might make more sense to wait until age 73. I am effectively already taking RMDs for income as my IRA withdrawal strategy. And I have already made charitable contributions. Therefore, starting QCDs at age 70 1/2 makes the most sense for me.
Chris, thanks for the article. How do these QCD’s effect IRMAA?
Since QCDs are tax-free they should therefore lessen the effect of RMDs on higher IRMAA brackets for Medicare recipients. But that’s something to double-check with the IRS.
Good article Chris. QCDs have been great for me. I donate a lot to our church, other Christian ministries and other charities. It greatly reduces my RMDs and has enabled me to take the standard deduction ever since the 2017 tax cuts.
It has also enabled me to do more Roth conversions within my 22% tax bracket. I have chosen to do to IRMAA tier 2 because I am fearful taxes brackets will revert back to pre 2017 levels. I have gone from 90% pre tax savings to 23% and hope to do more in 2024 and 2025.
I don’t have a traditional IRA, but utilize “bunching” charitable deductions every other year. An example would be our annual church donation. This is the year I bunch, so I will make my 2025 donation in December of this year in addition to this year’s donation made in January.
Bunching allows you to take the standard deduction one year and itemize the next.
There are also other deductions that can be bunched. Consult your tax advisor.
We do that, too. However, we’ve got to remember that some organizations should still be donated to in the non-itemizing years. We shouldn’t be miserly just because it’s a non-itemizing year. There is $600 you can deduct above the line now.
To clarify, “my” charities still get the same amount each year, just the timing is different. See church example above. As noted below my church will get its 2025 donation early in late December of 2024.
But accelerating a charitable contribution is always better for the charity, right?
That $600 tax break has disappeared, alas.
I’ve heard of that strategy but have not used it. It’s perhaps something to look into. Thanks!
We just went through the process of preparing for doing QCDs in 2024. Technically we could have also used QCDs in the last few months of 2023 since I was 70.5 by then but did not think about it until we were reviewing our 2023 tax returns.
Our IRA custodian (Schwab) has an IRA check writing feature that we enabled for the pre-tax IRA that will be used for the QCDs. We received a pad of “IRA” checks shortly after signing up for this feature. The checks can be used for any kind of distribution from the IRA but we will only use for QCDs and so we call them our QCD checks.
We also changed a high-dividend fund in the IRA, removing its automatic reinvestment, so that its dividends will provide the cash in the IRA for the QCDs without any need to sell anything.
We were concerned about how we could assure that each of our charitable contributions met the QCD requirements, the amount that would be deductable, and what kind of records we needed to keep.
The first thing we did was go through the list of charities and organizations we support and verify their legal status for tax-deductable contributions. The key document is the Form 990 that “Exempt From Income Tax” organizations must file with the IRS. These are public information and can usually be downloaded from the organization’s web site but can also be found at web sites that monitor the finances of charities. The item to verify that the 501(c)(3) box is checked for tax-exempt status.
A few of our supported charities do not have 990’s because they are either associated with public universities or a church. Fortunately the web sites for these had information about using QCDs for donations.
Some organizations have both tax-deductable activities and non tax-deductable activities and it is important that the donation be correctly identified. Usually a separate 501(c)(3) is incorporated and identified by adding “foundation” to the organization name.
We had concern that some of the organizations referred to our donations as “memberships” and even listed some monetary benefits of membership, such as free entry or discounts for events or gift shop items, as well as a subscription to their magazine. We wanted to make sure that the QCDs would be 100% deductable and not result in any taxable income from the IRA distribution.
We downloaded and reviewed publications 526, 1771, and 590 from the IRS web site. These are all about how to handle charitable contributions and IRA distributions. In publication 1771 the “Token Exception” and “Membership Benefits Exception paragraphs eliminated our concerns about the deductable status of our “memberships”.
The most important record to keep is the written receipt from the charitable organization. This is typically a mailed document on the organizations letterhead, with the tax-deductable amount, and the date the charity received the donation. The date determines the tax-year the donation applies to. Sometimes both the donation amount and a tax-deductable amount will be shown. We scan these to PDF files. We also keep files of the check images but it is the receipts that would be audited.
Next year when we have our 2024 taxes done, which is all handled online now, we will upload to our accountant a file with the list of QCD donations and total tax-deductable amount, the check images, and the scanned receipts, as well as the 1099-R. This will make it easy for our accountant to put the correct values into lines 4a and 4b of the 1040.
Thank you for this additional information. I just looked up the form 990 for what will be my first charity and confirmed that the correct box is checked.
I’m in the position of being too young for using the QCD. Rather, we are looking to see if a DAF is the right choice for us at this time. I’m recently retired and our reportable income is now in a much lower tax bracket. So we may use a DAF (maybe within our tIRA???) to help offset large Roth conversions.
DAFs are a good option, especially for those who need to mitigate a large tax liability due to monies outside of tax-deferred retirement accounts. I don’t have one, but I know that I could set one up with Fidelity, and I assume the other big firms (Schwab, Vanguard, etc.) offer them as well.
Ditto to all you said. I’m exactly in the same boat. Have been doing QCDs for two years. Good timely info.
I’ve even tried to talk our pastor into communicating to the parish to help with donations.
Thanks, Richard. We’re in the midst of a capital campaign at my church and I have been talking them up with the older folks there.
Chris, thanks for the great article. Sadly, I’m not sure how widespread this information is. I’m in my 6th year of volunteer tax preparation through AARP. I’ve prepared hundreds of returns, mostly for seniors. I’ve never seen one client with a QCD. My tenure is post-2017 TCJA, so the vast majority of our clients take the standard deduction. Many clients come in with charitable deductions and are surprised that they don’t provide a tax benefit. Had they used a QCD they would have seen some benefit.
I’m a volunteer tax preparer at a Goodwill
tax clinic. We get a lot of retired folks, but haven’t seen a QCD there either. It might be that many retirees, who use the free services, can’t afford much charitable giving.
Thanks, Rick. Yes, it does seem to be a well-kept secret. I think a lot of folks just take the std. ded. and call it a day, not imagining they have any other ways to reduce their taxes.
Thank you for this clear explanation of how QCDs affect taxes. I take the standard deduction and donate to various charities throughout the year. I plan to choose one primary charity and do a QCD this year, so I’ll save your post and re-read it when I do my taxes next year.
Thanks, Amelia. As you can see in the article, they’re very easy to do and relatively easy to claim‚ but I find it odd that the IRS has yet to accommodate them specifically on the 1040.
It’s easy to do multiple QCDs, so if you’d prefer to continue to support a number of charities that’s an option. My brokerage only allows one per trading day, but it’s all done online so takes about a minute to do one. Also, my husband and I are passing our tax savings on to the charities—each now is getting more.
That’s good to know, thanks.
Yes, easier than I expected. I did several throughout last year, all online. Some people like to wait until the end of the year, which makes perfect sense—maximizes their income or growth before the funds are withdrawn.
Thanks. I take my RMD in early December, so I’m planning to do the QCDs in November.
I became eligible to use your QCD strategy this year. Thanks for the warning about lines 4a and 4b in Form 1040 – but I’m a TurboTax user, too, so it’s something to monitor.
TurboTax was very helpful—I was pleased that it accounted for them, making things a little easier.
My wife comments, “Thanks. I like useful articles.” We’re not yet old enough for QCDs, but it’s a topic I bring up when older friends reach that age threshold.
Tell her I’ll take that as a compliment! Thanks.
Chris, thank you for this thorough and helpful article. I’m over a decade away from being eligible to use QCDs, so rules might change by the time I have that option available. Still, you’ve given me a lot to think about. Also, I checked out your website and read a couple of your articles there. I will be reading more of them—very well done.
Ken, yes, the rules seem to change fairly often. QCDs were originally tied to the age 70.5 RMD requirement. Interestingly, the RMD age has been pushed out to 73 but QCD eligibility remains at 70.5. Good for us!
Probably due to the incompetence of the Congressional aides who write the laws the Congresscritters pass without reading.
Thanks for this article. Can you or someone explain this statement using different wording:
“QCDs helped my wife and me, though the tax savings would have been greater if we hadn’t previously been itemizing our charitable contributions.”
I’m not clear on why this is the case. Regards,
If you’re itemizing, you already get some tax benefit from your charitable contributions. But for those who take the standard deduction, charitable donations offer no tax benefit, so QCDs are pure gravy — the chance to remove money from a traditional IRA with no tax bill, effectively making those charitable contributions tax-deductible.
Thanks, Jonathan, I couldn’t have said it better!