Qualified Charitable Distributions (QCDs) are a tax-efficient way for eligible IRA owners to support charitable organizations while managing taxable income. Individuals who are age 70½ or older may donate up to $108,000 in 2025 directly from a traditional IRA to a qualified charity. When structured properly, a QCD is excluded from taxable income, may satisfy Required Minimum Distribution (RMD) requirements, and can help reduce overall tax liability.
Tax Benefits of QCDs
- Tax-Free Distribution
Amounts transferred directly from an IRA to a qualified charity are excluded from gross income for federal tax purposes.
- RMD Satisfaction
For taxpayers age 73 and older, QCDs can satisfy all or part of the annual RMD without producing taxable income.
- Lower Adjusted Gross Income (AGI)
Because QCDs are excluded from income, they can reduce AGI and help avoid higher federal tax brackets and phaseouts for certain deductions and credits.
How to Make a Qualified Charitable Distribution
1. Meet the Age Requirement
You must be at least age 70½ at the time of the distribution.
2. Work With Your IRA Custodian
Instruct your custodian to transfer funds directly to a qualified charity. The check must be payable to the charity and not to you.
3. Choose an Eligible Charity
The charity must be a qualified 501(c)(3) organization. Private foundations and donor-advised funds generally do not qualify.
4. Stay Within the Annual Limit
The maximum QCD amount for 2025 is $108,000 per taxpayer, indexed annually for inflation.
5. Complete the Transfer by Year-End
To count for the tax year’s RMD, the distribution must be completed by December 31st.
6. Report It Correctly
Keep records from both the IRA custodian and the charity. On your federal return, report the distribution with a taxable amount of $0 and indicate “QCD” as applicable.
Michigan State Tax Treatment
QCDs and Michigan Taxable Income
Because a QCD is excluded from federal AGI, there is no amount relating to that distribution included in Michigan AGI. As a result, there is generally no Michigan state income tax on a properly executed QCD because the distribution never enters federal AGI, which is the starting point for Michigan tax calculations.
Interaction With Retirement Subtractions
Michigan allows subtractions for certain retirement and pension benefits that are included in federal AGI, subject to limits. Since QCDs are not included in federal AGI, they do not qualify for separate retirement subtractions under Michigan law but also are not taxed by Michigan because they are excluded from income at the federal AGI level.
Planning Considerations
Changes to Michigan retirement and pension benefit rules (including incremental retirement income tax changes under recent state legislation) may continue to evolve, so it’s important to monitor updates and consult with your tax advisor for the latest guidance.
Key Considerations
- Direct Transfers Are Required
If funds are distributed to you first, the amount becomes taxable and will not qualify as a QCD.
- Roth IRAs
QCDs generally provide no additional benefit when made from Roth IRAs, as qualified Roth distributions are already tax-free for federal purposes.
