Why are qualified charitable distributions popular?
Qualified charitable distributions (QCDs) are a valuable giving tool for IRA owners age 70½ or older who do not need their required minimum distributions (RMDs) for living expenses. By transferring funds directly from an IRA to your charitable organization, donors meet philanthropic goals, satisfy part or all of their RMD, and owe no tax on the distribution (up to the annual aggregate limit of $108,000 in 2025). Reducing taxable income without itemizing deductions helps donors minimize taxes and stay under income thresholds for Medicare Part B premiums. This, in turn, creates more flexibility in their overall financial and estate planning.
How were QCDs reported?
Previously, 1099-R forms did not include a code to identify QCDs. This left taxpayers responsible for indicating a QCD exclusion on their federal income tax returns. Unfortunately, donors often lost out on the generous benefits of a QCD simply because they didn’t inform their tax preparer or check whether their IRA custodian had reported it. And without specific notice from the donor, it was far too easy for tax preparers to overlook it on their tax return.
How did the IRS recently change QCD reporting?
In April, the IRS introduced new rules intended to streamline and increase the accuracy of QCD reporting. Donors may find these updates helpful. For all QCDs made on or after January 1, 2025:
• There is a new reporting code (Code Y).
• IRA custodians and trustees are required to use this distinct code to report these distributions in Box 7 of Form
1099-R.
• Custodians and trustees will combine Code Y with other applicable codes indicating a traditional IRA distribution (Code 7), a traditional IRA distribution of assets without a readily available fair market value (Code K), or an inherited IRA distribution (Code 4).
Do donors already know about this change?
Some will already have heard the news, but many of your donors are likely unaware of the change and would find it beneficial to learn more. Sharing this news opens up meaningful conversations about QCDs in general, including a reminder of IRS requirements.
What hasn’t changed?
Donors continue to be responsible for ensuring that their QCD follows all IRS rules and regulations. Receiving a 1099-R with Code Y from an IRA custodian does not necessarily guarantee that a distribution will qualify as a tax-free donation. Donors should confirm that the following requirements are met if they want to ensure the tax advantages associated with their gift:
• It must be a direct transfer.
• It must go to a qualified charitable organization (not a donor-advised fund or private foundation).
• The IRA owner must be age 70½ or older at the time of the distribution.
• The donor must keep the QCD within the annual aggregate limit.
• The QCD must be processed by December 31 to qualify for tax benefits in that tax year. (Donors should start the process in early December to ensure ample time.)
What questions remain?
The recent reporting change leaves some important questions. For example:
• How will an IRA custodian know when an IRA owner has already reached their QCD limit, especially if the donor has made multiple QCDs from multiple IRAs?
• How will an IRA custodian know if a charity is a qualified charity?
While IRA custodians are now required to report QCDs, it’s important to make sure that donors know they are responsible for ensuring that the QCD is valid.
What should we communicate to our donors?
• Share the good news of this reporting change. After all, this change should make it easier for donors to track their QCDs and ensure proper tax reporting—reducing the risk of lost tax benefits and the need for filing time-consuming corrections.
• Remind donors to follow QCD rules and keep records. Make sure they keep proper documentation for all IRA transfers and communicate any gifts to their tax preparer.
This new box is a small detail that can make a big difference. Helping donors understand the process strengthens trust and provides clarity. It can also open the door to larger discussions about RMDs, charitable beneficiary designations, and how donors can effectively weave charitable giving into their overall retirement plan.
