Qualified Charitable Distributions: One of the Most Overlooked Tax Strategies in Retirement

This week is Christmas, which feels like the perfect time to write a post about charitable giving.

I recently worked with a retired client couple who were excellent candidates for a Qualified Charitable Distribution (QCD):

• are charitably minded,

• still have relatively high income (pension/social security/part-time employment),

• are required to take RMDs, and

• hold a meaningful balance in a traditional IRA.

I introduced the concept to them and was able to save them thousands of dollars in taxes.  The only thing we changed was how they applied their charitable deductions. 

QCDs can be one of the most powerful (and underutilized) tax strategies for retirees. Here is how they work:

What Is a QCD?

Most people are familiar with the traditional way charitable giving can help you save on taxes. First, you make a donation to a qualified charity.  Then, you determine if the gift is large enough for it to make sense to itemize your deductions rather than taking the standard.   For a retired couple in 2025 over the age of 65, the standard deduction (not counting phaseouts) is $34,700. 

The main itemizable deductions are mortgage interest, charitable gifts, SALT taxes (state and local property tax, usually capped at $10k), and medical expenses (exceeding 7.5% of Adjusted Gross Income (AGI)).  Most retirees use the standard deduction if they no longer have a mortgage and don’t give at least $25,000 a year to charity.  When you choose the standard deduction, your charitable gift gives you no further tax benefit. 

It’s important to remember how this process works on the tax form. Itemized deductions are “below-the-line” deductions. They are applied after you calculate your Adjusted Gross Income (AGI). AGI is then reduced by deductions to arrive at taxable income, which determines your tax bracket.

A QCD works very differently. It is deducted “above-the-line” and, unlike a normal traditional IRA distribution or RMD, is not counted as income. Lower total income directly reduces your AGI. 

There are a few important rules:

• You must be age 70½ or older at the time of the distribution

• The funds must come from a traditional IRA (not a Roth IRA, 401(k), or 403(b))

• The distribution must go directly to a qualified charity, written from your brokerage on your behalf.

• The donation must be made in cash (not appreciated securities)

• The annual limit is $100,000 per person (indexed for inflation starting in 2024)

  
  

Why Use a QCD Instead of Donating the “Normal” Way?

There are several compelling reasons.

1. QCDs satisfy RMDs and are not counted as taxable income.

Because they are coming from your pre-tax retirement accounts and don’t count as income when you donate them, that means that you took advantage of tax-free growth all of those years and never had to pay tax on any of the portion that you gave to charity.  In contrast, if you take your RMD first, pay tax on it, and then donate the money, the income still shows up on your tax return—even if you later deduct the gift.

2. Lower IRA Balances → Lower Future RMDs

Because QCDs permanently reduce your traditional IRA balance, future RMDs are smaller. Over time, this can help keep you in a lower tax bracket and reduce lifetime taxes.

3. QCDs Reduce AGI (An “Above-the-Line” Benefit)

This is one of the most important—and most misunderstood—advantages. Because QCDs are excluded from income entirely, they reduce your Adjusted Gross Income, not just your taxable income.

AGI is a critical number used to determine:

• Medicare IRMAA surcharges

• Net Investment Income Tax (NIIT) exposure

• Taxation of Social Security benefits

• Eligibility for certain credits and deductions

• Phaseouts for other tax strategies

  
  

Charitable deductions taken below the line do not affect any of these calculations.

4. You can use a QCD for charitable giving and still claim the full standard deduction.

For retirees who no longer itemize, charitable gifts often provide little or no tax benefit because the standard deduction already exceeds their deduction had they itemized. 

A QCD changes this dynamic. Because the distribution is excluded from AGI income entirely, you receive a tax benefit for your charitable giving and preserves your opportunity to still take the standard deduction. In contrast, donating below-the-line does not reduce AGI and provides no additional tax savings for standard-deduction filers.

Being able to take advantage of both the charitable deduction in the form of a QCD and the standard deduction lowers your taxable income which can significantly lower your total tax bill. 

Let’s look at an example to see how the numbers might work:

Client Profile

• Married filing jointly

• Both spouses age 75

• Retired physician household

• Social Security + pension + portfolio income: $260,000

• Traditional IRA balance: $2.4M

• 2025 RMD: $95,000

• Annual charitable giving: $40,000

• No mortgage (typical for retirees)

  
  

2025 Reference Numbers

• Standard deduction (MFJ, both 65+): $34,700

• NIIT threshold (MFJ): $250,000

• IRMAA tiers (MFJ):

  • $266,001–$334,000

  • $334,001–$400,000

    
    

Scenario 1 — No QCD, Donate Normally (Itemized)

Income

• Other income: $260,000

• Full RMD taxed: +$95,000

  
  

  → AGI = $355,000

  
  

Deductions (Itemized)

• Charitable giving: $40,000

• SALT cap: $10,000

  → Total itemized deductions: $50,000

  
  

Taxable Income

• $355,000 − $50,000

  → Taxable income: $305,000

  
  

Federal Income Tax (2025)

At $305,000 taxable income (MFJ):

• Solidly in the 24% bracket

• Estimated federal income tax ≈ $57,500

  
  

NIIT

• MAGI above $250,000 = $105,000

• NIIT = 3.8% × $105,000 = $3,990

  
  

IRMAA

• MAGI $355,000 → $334k–$400k IRMAA tier

• Estimated Medicare surcharge:

  • ~$4,500/year (combined spouses)

    
    

Scenario 2 — $40,000 QCD (Standard Deduction)

Income

• Other income: $260,000

• RMD: $95,000

• QCD: −$40,000 (excluded from income)

  → AGI = $315,000

  
  

Deductions

• Standard deduction (65+ MFJ): $34,700

  
  

Taxable Income

• $315,000 − $34,700

  → Taxable income: $280,300

  
  

Federal Income Tax (2025)

At $280,300 taxable income:

• Still in 24% bracket, but much lower base

• Estimated federal income tax ≈ $51,500

✅ Income tax savings vs Scenario 1: ~$6,000

NIIT

• MAGI above $250,000 = $65,000

• NIIT = 3.8% × $65,000 = $2,470

✅ NIIT savings: ~$1,520

IRMAA

• MAGI $315,000 → $266k–$334k IRMAA tier

• Estimated surcharge: ~$3,000/year

✅ IRMAA savings: ~$1,500

Summary Comparison

Category	Itemize (No QCD)	QCD + Std Deduction	Annual Savings
AGI	$355,000	$315,000	−$40,000
Taxable income	$305,000	$280,300	−$24,700
Federal income tax	~$57,500	~$51,500	~$6,000
NIIT	$3,990	$2,470	~$1,520
IRMAA premiums	~$4,500	~$3,000	~$1,500
Total annual benefit	—	—	~$9,000

So, the simple move of switching their charitable donation vehicle from a direct gift to a QCD saved $9,000 in overall taxes and premiums.  The charity still gets their money, but you, the donor, have $9000 more in your pocket at the end of the day. 

Bottom Line:

Qualified Charitable Distributions are one of those rare strategies where everyone wins. The charity receives the same gift, the IRS collects less tax, and you keep more of your money. For retirees with large IRAs and ongoing charitable intent, QCDs are not an advanced tax trick—it’s simply an example of tax-efficient strategic financial planning.

If you are interested in learning more about working with us and seeing if we can find similar ways to maximize your returns, preserve your income and accomplish your financial goals, reach out to us at www.targetedwealthsolutions.com.

Disclaimer: the material in this blog post is intended for general educational purposes only and should not be considered specific financial advice. You should always consult with your personal financial advisor to see how it might fit within your personalized financial plan.