Lawmakers Pushing For IRA Reform That Would Give Retirees This Key Tax Advantage
Lawmakers Pushing For IRA Reform That Would Give Retirees This Key Tax Advantage
Paige CerulliTue, March 31, 2026 at 10:32 AM UTC
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A new bipartisan bill introduced in Congress in early March would give older Americans more charitable giving options, rewriting the tax code. The bill would allow older Americans to direct IRA-qualified charitable distributions (QCDs) to donor-advised funds (DAFs), a move that is currently prohibited by law.
By contributing to DAFs, donors receive an upfront tax deduction and several other benefits, so this bill could have a significant impact on charitable giving and its tax implications for your retirement plan.
Here's what you should know about how the bill could impact your charitable giving, as well as the tension surrounding its introduction.
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How qualified charitable distributions currently work
Under current tax law, individuals age 70 ½ or older can make a QCD directly to a charity from their taxable IRA. Donors can make the QCD in place of taking their required minimum distributions, and the donated amount isn't included in their taxable income. Making a QCD may help keep the donor from being pushed up into a higher tax bracket, reducing their tax liability.
For 2026, taxpayers can make a QCD up to $111,000, and that amount can be one lump donation or several donations to multiple charities. If a couple is married, each spouse can make QCDs totaling $111,000; if both spouses max out their limit, the couple's collective QCDs can total $222,000 for the year.
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The tax benefits of QCDs
QCDs offer several distinct tax benefits, and they almost always offer more tax perks compared to making a cash donation. Beginning in 2026, taxpayers who take the standard deduction can deduct up to $1,000 of any contribution they make to charity. However, any contributions larger than $1,000 don't qualify as a tax deduction. Since a QCD is excluded from the taxpayer's income, it functions like a tax break and allows them to deduct donations that wouldn't otherwise qualify for a deduction.
If taxpayers itemize their deductions, they face caps on items like the maximum charitable deduction they can claim. A QCD can offer taxpayers a higher deduction rate than they would otherwise qualify for, maximizing the benefits they see in return for their donation.
Why QCDs currently don't include donor-advised funds
A key requirement of QCDs is that the funds go directly to charities. Donor-advised funds (DAFs) work differently; the account is managed by a public nonprofit. A donor receives a tax deduction for making their contribution to the DAF, and the funds can be invested to grow, tax-free. Donors are able to recommend donations to IRS-qualified public charities.
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Since the law requires that QCDs are given directly to charities, DAFs, in which the funds are managed and invested, are excluded from QCDs. Money can potentially stay in a DAF for years, and donors lose out on some of the benefits that come with a QCD.
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How the new bill could change QCDs
The proposed bill would expand QCD eligibility to include DAFs, changing the requirement that QCDs must go directly to charities. By doing so, the bill would expand charitable giving flexibility, providing older donors with more options in how they want to give.
The potential downside of DAFs
Critics of the bill argue that since DAFs don't have to meet minimum required distributions, the money can sit in those funds for years. Critics believe that the funds allow for wealth hoarding, since donors receive an upfront tax break for the contribution but the money is left to sit, potentially for years, before it benefits any charities.
The new bill would not address that concern, since it won't implement any limit on how long funds can sit in a DAF.
The potential growth in giving
In contrast, supporters of the bill believe that the current tax code is restrictive, and changing it could encourage more charitable giving. "This simple, commonsense fix will make it easier for Americans to give donations to the causes that they value and will spur more people to invest in their communities," said Senator Cortez Masto (D-Nev).
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Bottom line
New 2026 tax rules in the One Big Beautiful Bill Act (OBBA) have increased the benefits that QCDs offer compared to cash donations. The OBBA limits charitable donation deductions to only deductions that exceed 0.5% of a donor's annual gross income. It also caps itemized charitable deductions at 35%, meaning itemized deductions are limited to a tax benefit of 35 cents on the dollar, while that cap was previously higher at 37%.
QCDs bypass the annual gross income floor and the 35% deduction cap, maximizing the tax benefits that donors receive. Additionally, by reducing a donor's taxable income, QCDs can help lower Medicare premiums and reduce taxes on Social Security benefits for increased savings. QCDs offer many benefits and can be a key component of a retirement plan, but be sure to consult a tax advisor about whether QCDs fit your giving strategy.
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Source: “AOL Money”
