- Qualified charitable distributions are a powerful tool to help meet your charitable objectives.
- A new one-time election to split-interest entities expands the possibilities of eligible charities.
Background
Qualified charitable distributions (QCDs) were initially established under the Pension Protection Act of 2006 as a temporary provision and were subsequently made permanent by the Consolidated Appropriations Act of 2016. This provision permits individual taxpayers to directly transfer funds from an individual retirement account (IRA) to a qualifying charity, enabling taxpayers to fulfill their charitable goals in a tax-efficient manner later in life.
QCDs are available to individuals aged 70½ or older. For 2025, the maximum contribution an individual can make through a QCD is $108,000. It is important to note that these limits apply on an individual basis—not a tax return basis—and are adjusted for inflation annually. Consequently, a married couple filing jointly may contribute up to $216,000 in 2025, provided each spouse is 70½ or older and makes a distribution up to the annual individual limit from their respective IRAs. Distributions must be made directly from the IRA to an eligible charity. This means the funds cannot be directly or constructively received by the individual taxpayers. One significant advantage of QCDs is that they can reduce or satisfy a taxpayer’s required minimum distributions (RMDs) for the year in which the distribution is made.
Eligible charities encompass most 501(c)(3) charities, also known as public charities, such as churches, schools, hospitals, and museums. However, donor-advised funds, supporting organizations, and private foundations are explicitly excluded from the definition of eligible charities for QCD purposes. Charitable remainder trusts and charitable gift annuities are generally excluded as well, but this article will explore unique provisions that allow these charitable vehicles to qualify.
For a QCD to be valid, the donation must be fully deductible, meaning the IRA owner must not receive any benefit in exchange for the donation. In addition, the distribution must be one that would have been included in the taxpayer’s gross income if it were not made as a QCD. While distributions from traditional IRAs would generally satisfy this requirement, Roth IRA distributions may have limited applicability as they are typically not includable in gross income.
Insight from Forvis Mazars: When QCDs were first enacted, the eligibility age aligned with the required beginning date (RBD) for RMDs. However, due to changes introduced by the SECURE Act of 2019 and SECURE 2.0 Act of 2022, the RBD age has increased to 73, while the age for making QCDs has remained at 70½.
Benefits of QCDs
From a tax perspective, QCDs are a powerful tax savings tool that allow individuals to enhance their charitable impact while reducing their tax liability. Unlike traditional charitable contributions, which are only deductible if the taxpayer itemizes their deductions, QCDs offer a distinct advantage as they are deductible regardless of whether the taxpayer itemizes or takes the standard deduction. QCDs are excluded from a taxpayer’s gross income, potentially providing several benefits, including but not limited to:
- Increased eligibility for tax credits
- Decreased tax liability
- Increased “above the line” deductions with modified adjusted gross income (AGI) limitations
- Increased “below the line” (itemized) deductions with an AGI phaseout
- Reduced taxability of Social Security benefits
- Eligibility for “direct” Roth IRA contributions
When considering charitable contributions outside of a QCD, it is important to note that even if a taxpayer itemizes, their charitable contribution may be subject to certain income limitations. Cash charitable contributions are generally limited to 60% of a taxpayer’s AGI. Contributions exceeding this amount may result in the disallowance of the deduction in the current year, with the excess potentially carried forward into future years.
Insight from Forvis Mazars: Certain states don’t allow taxpayers to take a deduction for charitable contributions taken as an itemized deduction. However, those states may allow taxpayers to exclude distributions from a QCD from gross income.
One-Time QCD to Split-Interest Entities
On December 29, 2022, Congress passed the SECURE 2.0 Act of 2022, introducing significant changes to QCDs. Effective January 1, 2023, taxpayers ages 70½ or older are permitted to make a one-time QCD to specific split-interest entities. A split-interest entity is an arrangement where benefits are shared between charitable and noncharitable beneficiaries. In these arrangements, one party will hold an income interest, and the other party will hold a remainder interest. Eligible split-interest entities under this provision include charitable remainder unitrusts (CRUTs), charitable remainder annuity trusts (CRATs), and charitable gift annuities (CGAs). For the 2025 tax year, the maximum a taxpayer can contribute to a split-interest entity is $54,000. Similar to traditional QCDs, contribution limits apply on an individual basis rather than a tax return basis and are adjusted for inflation annually. In 2025, a married couple filing jointly may contribute up to $108,000, provided each spouse is 70½ or older and makes a distribution up to the annual individual limit from their respective IRAs.
For CRUTs and CRATs, these trusts must be funded exclusively through the one-time QCD election, with no subsequent funding permitted. In addition, only the donor and spouse may hold a non-assignable income interest in the split-interest entity. Distributions to individuals will be treated as ordinary income regardless of the underlying income distributed from the trust. This provision ensures that distributions from an IRA are consistently considered ordinary income to the individual.
Similar to charitable remainder trusts, CGAs must be exclusively funded by the one-time QCD contribution. In addition, any payment made from the annuity will be considered ordinary income. However, CGAs have distinct rules governing the application under this one-time election. Notably, fixed payments must begin within one year from the date of funding, and the fixed payment must be 5% or greater, which is not normally required for CGAs outside this one-time QCD election. This provision standardizes CGAs with the previously mentioned charitable remainder trusts, which are always required to make fixed payments of 5% or greater on an annual basis.
While this one-time election is new and appealing to those charitably inclined, it is crucial to consider the costs related to these charitable instruments. For charitable remainder trusts, costs include the required initial valuation for a CRAT or the annual valuation for a CRUT. In addition, there are administrative costs related to maintaining the trust and fulfilling yearly reporting requirements. CGAs may present a more practical option when considering the one-time election, as they are generally less costly to set up and maintain and are simpler to establish than the previously mentioned trusts.
How Forvis Mazars Can Help
If you have any questions or need help, please contact our Private Client professionals who can help you navigate the nuanced rules behind QCDs and may be able to assist you in effectively applying them in a tax-advantageous way.