What's the most tax-efficient way to donate to charity?

By Dan Moisand

Here's how to make your donations beneficial for both you and the recipient

Dear Dan,

I usually give to charity out of my IRA. Is that still wise given the new charitable deduction?

Sincerely,

Tax-Conscious Donor

Dear Tax-Conscious Donor,

Yes, donating from your IRA is likely the most tax-efficient way to give.

Making a qualified charitable distribution, known as a QCD, is a tax-smart way for anyone 701/2 or older to fund eligible charities they want to support. Normally, you are taxed on funds distributed from your IRA. However, donations made properly as a QCD are not taxable. Each eligible individual IRA owner can make an unlimited number of distributions from their IRAs to an unlimited number of qualified charities, up to a cumulative total limit per IRA owner. The limit is increased annually for inflation and is $111,000 for 2026.

If you're subject to required minimum distributions, or RMDs, a QCD can count toward that requirement without adding to your taxable income. That's what makes QCDs particularly useful: The donated amount stays out of your adjusted gross income (AGI). Put another way, if you were required to take $30,000 out of your IRA and you made $30,000 of Qualified Charitable Distributions, your RMD would be satisfied for the year, you wouldn't pay any taxes on the withdrawal, and none of the $30,000 is counted in your AGI.

Why does that matter? As your AGI rises, a series of various tax provisions can be triggered. For instance, you could lose deductions, owe additional tax on investment income, or face a surcharge causing higher Medicare premiums, known as the income-related monthly adjustment amount (or IRMAA). Several provisions in the One Big Beautiful Bill Act also depend on income, such as the new enhanced senior deduction of up to $6,000 for eligible taxpayers age 65 or older, or $12,000 for a couple if both qualify. That deduction phases out as income rises.

What about the new charitable deduction? Starting in 2026, taxpayers who do not itemize can deduct up to $1,000 in cash gifts to eligible charities, or $2,000 for a married couple. Checks and credit-card donations count as cash. This deduction is available on top of the standard deduction, with no income limit.

Going the IRA route

If your intent is to give to charity from your IRA again this year and those gifts will satisfy part of your RMD, you are making a tax-smart move. While you could cut a check for $2,000 from your checking and offset it with the new deduction, your AGI will be $2,000 higher than if you donated from the IRA via a QCD. There is a chance that extra amount could cost you additional dollars elsewhere on your tax return or via higher Medicare premiums.

Further, by donating from the IRA, unless you are leaving the IRA to charity, you are donating pre-tax funds that would otherwise be taxed at some point to either you or your beneficiary. Comparatively, the money in your checking account was already taxed and will not be taxed again in the future.

Think of tax time

You're likely to see the consequences of the way you donate come tax time.

If you're among the roughly 15% of filers who itemize, there are new rules to consider too that can make a QCD more valuable. When you make donations outside of your IRA, they must be entered on a form called Schedule A. That entry on Schedule A is now reduced by an amount equal to 0.5% of your AGI. For example, with an AGI of $100,000, the first $500 you give won't be included in your deduction - instead, it remains as part of your taxable income. If you give via a QCD, there is no such reduction, and the entire donation is excluded from income.

There's another limit if your income is high enough that you are in the top federal tax bracket of 37%. A new rule limits the tax benefit of your total itemized deductions on Schedule A. I won't go through that calculation here, but readers should know the net effect is that those deductions may reduce your taxes by 35% of the deductions rather than by 37% as one might expect from that tax bracket.

These new rules for itemizers are additional considerations on top of the AGI triggers previously mentioned. By donating via a QCD, 100% of the gift is excluded from your gross income, is not taxable and is unaffected by these limitations and AGI-related snags.

While the new deduction for those using the standard deduction will help many households, if you are over 701/2, giving to charity still makes sense. Just be careful to follow proper processes so the checks are payable to the charity, you stay within the annual limit, $111,000 per taxpayer in 2026, and the charities are legitimate qualified charities. Most public charities qualify but if you are unsure, the IRS provides a search tool.

If you have a question for Dan, please email him with "MarketWatch Q&A" on the subject line.

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-Dan Moisand

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11-14-26 0900ET