The Cost of Charitable Giving Via QCDs May Be Much Lower than You Think

MaxiFi can uniquely optimize your QCD charitable tax break

Economics Matters — Blog/Podcast/Financial Riddler/MaxiFi Puzzler

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When It Comes to Charitable Contributions, Americans Could Use a Hand

Last year Americans contributed close to $600 billion to charity. That’s both a lot and a little. It’s more than the GDP of 85 percent of the 195 countries of the world. But it’s only 2 percent of U.S. GDP — far less than the 10 percent-of-income rule set by Abraham in the book of Genesis.

But what if we could get Uncle Sam to match our donations? Would that loosen our wallets?

Prior to 2017 passage of the Tax Cuts and Jobs Act (TCJA), Uncle Sam offered a much larger tax break to far more people.

The reason?

The TCJA raised the standard deduction leaving most households unable to deduct their charitable contributions to lower their taxes. Yes, we were and are still allowed to itemize our charitable contributions, but taking the standard deduction, will, for most of us far exceed our total itemized deductions.

The Tax Policy Center provides a nice summary of TCJA’s increase in the cost of giving to charity.

TCJA made major changes that discourage charitable giving relative to prior tax law. It lowered individual income tax rates, thus reducing the value of all tax deductions. It increased the standard deduction to $13,850 for singles and $27,700 for couples (in 2023), capped the state and local tax deduction at $10,000, and eliminated other itemized deductions—provisions that significantly reduced the number of itemizers and hence the number of taxpayers taking a deduction for charitable contributions. Overall, the TCJA reduced the marginal tax benefit of giving to charity by more than 30 percent, raising the after-tax cost of donating by about 7 percent.

Yes, the One Big, Beautiful Budget Act permits non-itemizing singles to deduct $1K and non-itemizing marrieds to deduct $2K of charitable giving over and above the standard deduction. But this is small potatoes.

Contributing on Uncle Sam’s Dime — Qualified Charitable Distributions (QCDs)

For most of us, the only way to get a major tax break from contributing to charities is to wait until 70 1/2 and make Qualified Charitable Distributions — QCDs — from our IRAs. Normally, IRA withdrawals are subject to taxation. But a QCD is not. Ignoring certain restrictions, each dollar contributed to a qualified charity from a taxable IRA comprises a QCDs, triggering a $1 tax exclusion. Exclusions beat deductions because they are available regardless of whether you itemize.

There are restrictions apart from age. You can’t make QDCs above a fixed, but CPI-indexed, annual limited. For 2025, it’s $108,000. Also, cumulative post-age-70 1/2 IRA contributions reduce future excludable QDCs dollar for dollar.

QCDs Lowers Your RMDs

QDCs can satisfy your RMDs — required Required Minimum Distributions — the requirement that you must make taxable retirement account withdraws starting at 73 for those born in the 1950s and 75 for those born in 1960 and beyond. Indeed, some people limit their annual IRA withdrawals to their annual RMDs and contribute the amount withdrawn to charity — leaving the last to bequeath to their heirs. Since the contributions are QCDs, they provide tax exemptions that exactly offset the taxes due on the IRA withdrawals. Other people may make QCD contributions that exceed or fall short of their RMDs.

To Make QCDs Qualify for RMDs, You Need to Take Your QCDs First!

After releasing the first draft of this blog, William Barnard, a simply brilliant CPA out of Dallas who is a long-time user of MaxiFi, pointed out something that’s critical, which I didn’t realize. For your QCD to count toward your RMD, you need to make your QCD first. Thus, if you take your, say, $6000, RMD in, say, April, and make what you think will be a fully qualified QCD of, say, $10,000, in June, you’ll need to pay taxes on the full $6000 of your RMD making only $4,000 of your total $10,000 contribution tax exempt. Stated differently, you get a $10,000 tax exemption but have a $6,000 tax liability because you withdrew your RMD before you had made the $10,000 contribution.

Thus, if you are going to make QCDs during the year, make sure to make them before you take RMDs, which may either not be required or required only in part.

QCD Tax Kickers

Suppose you’re in, say, the 24 percent federal income-tax and the 4.75 percent Rhode Island state-income-tax brackets. Then $1 QCD contribution would appear to cost $1 less 28.75 cents or 71.25 cents. Stated differently, you’d believe that Uncle Sam is lowering your price of donating, via your IRA, to your favorite charities by 28.75 percent.

But you’ll be missing three additional major tax breaks provided by QCDs — breaks that go beyond raising your standard federal- and state-income taxes. First, since QCDs aren’t counted as taxable income, they don’t raise the taxation of your Social Security benefits under the federal and many state income taxes. Stated differently, they can keep you from facing this form of taxation or limit its impact. Indeed, if your Modified Adjusted Gross Income (MAGI) is in the right range, increasing your MAGI by an extra dollar can lead to an extra 85 cents in taxable Social Security benefits. That transforms your effective marginal tax rate from 28.75 percent to 53.19 percent! In this case, a $1 QCD might cost only $(1 - .53) or 47 cents.

Second, the exclusion of QCDs from taxable income means QCD-designated IRA withdrawals won’t raise your Medicare Part B IRMAA taxes (“premium” is the official name) or flip you into a higher IRMAA tax bracket. Be aware, in this regard, that having just $1 more in taxable income can raise your IRMAA “premiums” two years later by as much as $1,332 ($2,664) if married, with the marginal tax rate on the extra dollar equalling, if married, 266,400 percent!! The reason is that in moving into a higher IRMAA bracket, the extra tax is assessed not on income above the bracket threshold, but on all income, measured, in this case, as Modified Adjusted Gross Income lagged two years. (Note, there are different MAGI measures. The IRMAA MAGI differs from that controlling Social Security benefit taxation.)

Third, QCD contributions lower the path of your future regular assets. This, in turn, reduces the path of future taxation of regular asset income compared with what otherwise would arise.

Marginal Tax Brackets Aren’t Well Defined. Beware Those Who Pretend Otherwise

If your accountant or financial advisor starts talking to you about your marginal tax bracket, maybe it’s time to do your own financial and tax planning using MaxiFi Planner. Its price is a mere $109 for the base program. Tens of thousands of households have used the program all on their lonesomes or with the help of our free, weekly MaxiFi office hours. Check out these testimonials. Others, who are too busy, too freaked about their finances, or too computer adverse, engage me or my colleagues (click here, here, and here) to flight-check, co-pilot, or pilot their MaxiFi planning.

Bankrate named MaxiFi the “Best Financial Planning Software of 2025”. Assessing particular financial decisions — be it spending, saving, contributing to specific retirement accounts, switching jobs, retiring early, Roth converting, optimizing Social Security benefit collection, downsizing, moving states, and, yes, making QDCs — requires highly sophisticated software that gets all tax, benefit, and cash flow issues right for all your future years, not just this year.

I’m going to illustrate MaxiFi’s power for assessing the true cost of making charitable contributions via QCDs. Before doing so, I need to make one more general point about QDCs:

QCDs Can Make a Huge Difference to Your Optimal Roth Strategy

Making QCDs changes your entire future course of taxes, which will change your entire future course of sustainable spending, which will change your entire future course of taxes, which will change … And since your optimal Roth conversion strategy is focused on lowering your lifetime taxes, that strategy depends crucially on your planned QCDs. Take the extreme case in which you fall below the QCD limits and intend to pair all IRA withdrawals dollar-for-dollar with QCDs. Then IRA withdrawals won’t trigger taxes and the lifetime taxes from such withdrawals can’t be further reduced via a Roth conversion strategy. In this case, the optimal Roth conversion strategy is to do no conversions.

Let me first show you how MaxiFi can help you plan your QCDs. Then I’ll illustrate how QCDs can alter your optimal Roth strategy.

Illustrating MaxiFi Planner’s Ability to Compute the Cost of QDCs

Meet George, a 70-year-old lifetime bachelor, who lives in a paid-off, $1 million home in Rhode Island. George, now retired, was a high earner. This, plus patiently waiting until age 70 to collect, have translated into an annual Social Security benefit of $61,303. George has a $3 million IRA and $1.25 million in regular assets. He is invested in a TIPS ladder yielding, on average, 2.19 percent real.

George is a loner. He has no kids, doesn’t party, and spends his time collecting dead butterflies. He vacations once a year at Butterfly World (BW) at Coconut Creek, Florida. Butterfly World, as everyone knows, houses the largest collection of butterflies on the planet — over 20,000 live butterflies representing 150 species. George plans to bequeath his house to BW, but he’s also considering making annual QCD gifts to the non-profit.

MaxiFi’s Base Plan

MaxiFi’s base plan, which assumes no annual BW gifts, shows three things. First, George can spend $147,997 in today’s dollars, year in and year out, through age 100 if he lives that long. And that’s just his sustainable discretionary spending. I.e., it’s over and above his fixed/required spending on taxes, Medicare Part B IRMAA premiums, and housing costs ($37.5K real per year). Second, George’s RMDs will be more than covered by smoothly withdrawing his IRA starting at age 73, the first year his RMDs kick in. Third, George sustainable discretionary spending is far higher than his actual annual $95,000K in real discretionary spending — a spending level with which he’s quite happy.

George Makes Annual Gifts of $50K Real to Butterfly World

How much would George’s sustainable discretionary spending drop were he to gift $50K real annually to BW, but not make the contribution from his IRA, i.e., as a QCD? Instead, George would, in this hypothetical, simply taken IRA withdraws, on which he’d pay taxes, and then use the post-tax funds and his other regular assets to make the $50K in annual contributions. In short, he’d send the funds to BW from his checking account, not his IRA. To calculate this means to helping BW, I ran MaxiFi specifying a $50K real annual non-tax-related special expense. The answer MaxiFi produced was obvious — a $50K reduction in annual discretionary spending. This leaves George with $97,997 ($147,997 - $50,000) in sustainable annual discretionary spending.

Why is this obvious?

From the program’s perspective, George’s annual $50K charitable giving in the form of special expenses is no different from discretionary spending.

The story is quite different if George runs MaxiFi specifying no special expenses, but rather annual $50K real special IRA retirement-account withdrawals earmarked as QCDs. Note to MaxiFi users. I copied George’s base profile under the name Base Profile QCDs, clicked on George’s retirement accounts in the program’s left-hand-side input menu, clicked on George’s IRA, and specified at the bottom $50K in annual real QCD special withdraws. Please see the chart below.

How Much Do George’s QCD-Based Contributions Really Cost?

As the next chart shows, specifying George’s gifts as IRA-based QCDs, rather than as non-tax-related special expenses from George’s checking account, dramatically reduces the lifetime cost of George’s charitable giving — indeed, by a whopping $477,579 in present value!

On an annual basis, the tax saving from donating to BW on a QCD basis is $20,926 or 42 percent of the $50,000. Thus, every dollar George gives to BW cost him only 58 cents. That’s a far lower price than one would calculate based on George’s current 22 percent federal marginal tax bracket and RI’s 4.75 percent state marginal tax rate. I.e., using QCDs costs George 58 cents, not 73 cents. Another way to describe the value of using QCDs is in terms of George’s non-charitable discretionary spending. It rises by 21 percent.

Furthermore, George can use his $20,926 in annual tax saving to increase his BW donations. I.e., George can specify even large QCDs, say additional taxes, and use those tax savings as well for QCDs. In fact, George can make not $50K in QCDs annually, but just over $85K and still be able to enjoy $95K in annual real discretionary spending! In short, MaxiFi lets George figure out to the dollar how much to get Uncle Sam to contribute to BW on Uncle Sam’s, not his own dime while still enjoying his desired living standard.

Why Are the Gains from QCDs So Huge?

The explanations for the QCD gains are fourfold. First, George’s federal tax bracket doesn’t remain fixed through time. Indeed, it rises substantially once he reaches age 73 and starts non-QCD-designated IRA withdrawals. Hence, George’s annual QCDs entail larger federal tax savings in the future than in the present. Second, George’s QCDs lower Rhode Island taxation since each dollar of QCDs lowers RI taxable income by $1. Third, George’s annual QCDs reduce his IRMAA taxes. Fourth, making QCD-designated contributions reduces both federal and RI taxation of George’s Social Security benefits.

To be precise, in making annual $85K QDCs compared to making non-QCD special withdrawals, George saves, in lifetime present value, $578,801 in federal income taxes, $99,264 in RI state income taxes, and $99,036 in IRMAA Medicare Part B taxes. That’s close to $800K in lifetime tax savings! And all George needs to do is annually transfer, in real dollars, $85K to BW from his IRA account rather than paying BW $50K out of his checking account.

Either move leaves George with a bit more than the $95K he needs to support his living standard. But George’s use of QCDs let’s him donate, over his lifetime, close to $800K more in present value. This perfectly safe move let’s George goose up his donations to BW by 70 percent entirely at Uncle Sam’s expense! This, in the parlance of Wall Street, is finding alpha.

Precision Calculations

I hope I haven’t lost you in the numbers. I’m conveying them to emphasize the precision involved in MaxiFi’s calculations. Its hallmark is making sure everything is internally consistent to the dollar. Let me rebeat this dead horse. Internal consistency is essential as everything depends on everything — George’s taxes impact his affordable discretionary spending and BW contributions, but George’s discretionary spending and BW contributions impact his taxes — federal, state, and IRMAA. Getting everything perfectly lined up under the hood entails hundreds and sometimes thousands of specialized iterations. Yet, MaxiFi generally takes less than one second to run. No other software tool on the planet gets the answer to QCDs or, indeed, any financial planning problem remotely right. I say as a warning. Financial planning is not a guessing game. In George’s case, he either learns what QCD-based charitable giving really costs or he ends up contributing too little or too much.

Impact of QCDs on Optimal Roth Conversions

Do Roth conversions make sense if George is contributing to BW out of his regular assets, not as QCDs from his IRA? They do by making very large Roth conversions — $2,177,630 over the next three years before his RMDs kick in. According to MaxiFi’s Roth Conversion Optimizer, George saves the most in lifetime present value taxes by converting $1,142,400 this year, $394,003 next year, and $641,227 the following year, with total $235,611 in total lifetime present value tax savings.

But what’s MaxiFi’s optimal Roth conversion plan if George makes $85K in annual real QCD IRA contributions to BW, not $50K in annual checking account contributions to BW? It’s very different. Now George should convert far less — $1,223,333 over the next three years, with $423,278 this year, $407,327 next year, and $392,728 the following year producing the largest lifetime tax savings.

Why does George still gain from Roth conversions given he’s making QCDs? The answer is that this IRA withdrawals exceed his RMDs. Hence, going big, which means large immediate conversions in the short run, will still lower his future lifetime taxes, valued in the present, substantially — by $174,412.

Conclusion

If you want to make tax-efficient charitable contribution, QCDs are a tremendous means of doing so. MaxiFi can calculate what QCDs really cost and show you how QCD-based tax savings can be used to either raise your lifetime discretionary spending, increase your terminal estate, or make even larger QCDs or non-QCD charitable contributions. The icing on the cake is finding yet additional ways in MaxiFi to raise one or more of these three types of outlays by maximizing your lifetime Social Security benefits, lowering your lifetime taxes (e.g., via Roth conversions, determining whether to contribute to Roth or non-Roth accounts, and deciding when start regular retirement account withdrawals), working longer, downsizing, etc. Give it a try!

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