By Andy Ives, CFP®, AIF®
IRA Analyst
During our recent Ed Slott and Company’s Instant IRA Success workshop in Brooklyn, NY, we were presenting information about qualified charitable distributions (QCDs) when an audible groan emanated from the crowd. Over the grumbling, an exasperated woman’s voice was heard making a loud complaint. The attendees were not criticizing the presenters or any part of the program. What they were frustrated with was news from the IRS.
In the “2026 Instructions for Forms 1099-R and 5498,” the IRS included the following language on the very first page: “Code Y for box 7a on Form 1099-R. We added code ‘Y’ to the list of codes for box 7a to identify a qualified charitable distribution (QCD). See QCDs, later. For tax year 2026, the use of code Y to report a QCD is optional. If you are completing and filing a 2026 Form 1099-R, you may choose, but are not required, to enter code Y in box 7a.”
A QCD is a great way for charitably inclined IRA owners to donate. As long as the funds are properly distributed to the charity and all the QCD rules are followed, then distributions (up to $111,000 in 2026) can be excluded from income. For IRA owners subject to taking required minimum distributions (RMDs), a QCD can even offset all or part of that income. It’s a win/win.
What has been the problem with QCDs is not the QCD itself, but the reporting of the donation. Historically, IRA custodians were not required to report a QCD. There was never a code on Form 1099-R to identify this special distribution. It was up to the taxpayer to inform the IRS on the tax return that a QCD had been completed (or to tell the tax preparer to do so). As a result, QCDs were often not reported, resulting in a taxable distribution.
On May 12, 2025, the IRS released instructions for the 2025 Form 1099-R. Those instructions announced for the first time that the IRS had created a new “Code Y” to identify a QCD on the 1099-R. This was welcome news to tax preparers and financial advisors. Since the new code announcement came mid-year, it was no surprise that the IRS made it optional for 2025.
But apparently this ship takes time to turn. Upon release of the 2026 “Instructions,” the new code Y is again listed as an optional feature. Hence, the groans from the crowd.
While I understand the frustration, I also understand the optionality of the code for at least another tax year. Our guess is that the IRS is allowing IRA custodians time to implement rules and paperwork to cover their tails in the event of a “bad QCD.” It’s not unreasonable to think that IRA custodians will build some sort of “hold harmless” language into their custodial documents to avoid being held liable for placing a Code Y on a 1099-R, even if the distribution didn’t qualify as a QCD. After all, an IRA custodian does not want to police the credentials of every charity. And how will the custodian know if a person hasn’t already hit the annual QCD cap from another IRA at a different institution? These reasons likely explain why “Code Y” is optional again in 2026.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
https://irahelp.com/qcd-code-y-optional-again-in-2026/