The IRS tracks QCDs by matching the distribution codes provided by your IRA custodian on Form 1099-R with the amount you exclude from your taxable income on your Form 1040. Traditionally, custodians did not distinguish between a check sent to you and a check sent to a charity. However, starting with 2025 distributions, the IRS introduced Code Y to specifically flag these transfers. If your custodian uses this code, the IRS receives a direct signal that the money was a tax-free gift.
The IRS primarily knows you made a Qualified Charitable Distribution (QCD) through the combination of your Form 1099-R and the specific notations you make on Form 1040. While a new reporting identifier called Code Y was introduced for the 2025 tax year to help the IRS automatically identify these gifts, its use remains optional for many custodians for 2025 tax returns, meaning manual reporting is still your best defense against overpayment.
Although Code Y was officially added to the 2025 IRS instructions, the agency issued a last-minute update making its use optional for the 2025 tax year. Many large financial institutions and IRA custodians were unable to update their internal software systems in time to support the new two-digit coding system (such as Y7 for a normal distribution or Y4 for an inherited IRA). As a result, many taxpayers will still see a standard “Code 7” on their 1099-R for 2025, even if the funds went directly to a 501(c)(3) organization.
If your custodian does not use Code Y, you must manually “tell” the IRS about the gift to avoid being taxed on the distribution. You do this by:
Without the “QCD” notation or a Code Y on the 1099-R, the IRS has no way of knowing the distribution was charitable. They will assume the full amount is taxable, which could inadvertently increase your Adjusted Gross Income (AGI) and trigger higher Medicare premiums (IRMAA) or taxes on Social Security benefits.
If the IRS questions a distribution, they will look for a contemporaneous written acknowledgment from the charity. This is a receipt or letter from the nonprofit stating that you received no “goods or services” in exchange for the gift.
Current guidance suggests that the IRS intends for Code Y to become the standard reporting method. While 2025 was a transition year with optional participation, most tax experts expect the IRS to require Code Y for the 2026 tax year (filings in early 2027) as financial institutions finish their system upgrades.
A QCD can only be made from a SEP or SIMPLE IRA if the plan is “inactive,” meaning no employer contributions were made to the account for the plan year ending with or within the tax year of the distribution. If your plan is active, the IRS will not recognize the transfer as a QCD, regardless of whether Code Y is used.
Yes. The IRS aggregates all 1099-R forms associated with your Social Security number. If the total amount excluded as a QCD across multiple IRAs exceeds the annual limit ($108,000 for 2025; $111,000 for 2026), their system will likely trigger an automated notice for the underpayment of tax on the excess amount.
Written by Andrew Matz, Financial Planner at Oak Road Wealth Management.
