Q: We had our financial planner look over our estate plan. She told us our IRA beneficiary setup is completely separate from how our trust distributes things. We had no idea. Is this right?

A: Your planner is absolutely right. Your IRA money won’t just automatically follow the language laid out in your trust. Unless you named your trust as your IRA’s beneficiary – something I don’t often recommend – your IRA is essentially a standalone asset with its own marching orders when you die.

Think of your estate plan as having two hands. Your left one might hold assets like your real estate, your taxable investment accounts and your bank accounts. These will go to your heirs based on your will or your trust’s language. Your right hand might hold your retirement accounts, like IRAs, 401(k)s, annuities and insurance policies. These transfer directly to the named beneficiaries that are on file for those accounts.

So, it’s pretty important that your left hand knows what your right hand is doing! 

Q: You recently mentioned there’s a new tax rule that lets us deduct some of our donations even if we don’t itemize. Tell me more, please.

A: The new tax law passed last July added a new charitable deduction feature. Starting this year, you now get to use a charitable deduction on a limited basis, even if you use the standard deduction. Before this change, if you didn’t itemize, your donations weren’t deductible.

You can now deduct up to $1,000 per year of cash donations to charities. It can’t be donations of items, just cash. For married couples, the max is $2,000 per year. 

For the past 8 years it seems like most people didn’t really know their charitable donations were not even tax deductible. Thankfully, people were still generous anyway. But, with this added tax incentive, maybe they will give just a little bit more now.

Q: From the looks of my recent tax return, it appears I have some capital loss carryovers from a few years ago. Will these ever expire? 

A: Well, there is some good news that might make you feel a little bit better. Your capital loss carryovers won’t just disappear. They just keep rolling forward until you are able to use them all up, even bit by bit.

Your loss carryovers are first used to offset any capital gains you happen to realize. And, if your loss carryovers are bigger than your realized gains – or even if you don’t have any gains at all – you still get to use up to $3,000 of your past losses each year.

You basically get to chip away at your loss carryovers until they are all gone. It might be a slow process at $3,000 a pop, but they won’t just expire unused. That is, unless you die without using them up. 

By the way, the annual limit amount hasn’t been updated for inflation, ever. It was put in place in the late ‘70s and now set in stone for nearly 50 years! 

Q: My tax person has told me to make estimated tax payments this year. I don’t love the idea. It seems like extra work. My paycheck takes out taxes for me already, doesn’t it?

A: The tax withholding done through your paycheck gets most of the job done, I’m sure. But, my suspicion is you have things like investment income, rental income or possibly you have a side gig as an independent contractor. None of that income is taxed automatically along the way. If it adds up to enough, you do need to pay taxes on it during the year. Your tax preparer is just trying to keep you from getting hit with underpayment penalties and interest.

In my view, Michigan hasn’t made this as easy as it should be. Unlike the US Treasury, which lets you set up automatic estimated payments when you file your previous year’s tax return, Michigan makes you either send in a check every few months or go online to make the payments.

If you want to make this a little easier, you should visit the MiTreasury e-Services website to schedule your quarterly estimated tax payments. Other states allow people to set up their estimated tax payments when they file their tax return. Not Michigan.

Q: My wife and I are in our mid-60s and we donate quite a lot to charities every year. Once again, we didn’t get any tax deduction for our donations. We’re not quite old enough to use our IRAs for those donations yet. Is there a smarter way for us to donate and get some tax benefits?

A: Yes, there is a smarter way. Since 2018, the standard deduction has been really big, especially for married couples. In fact, most people don’t itemize their deductions anymore. So, if you’re not itemizing, most of your charitable donations don’t provide any additional tax benefit. 

By the way, starting this year – even if you use the standard deduction – you are now allowed to deduct up to $2,000 of cash donations as a couple. But, that amount seems small compared to your giving habits.

Instead of donating your normal amount each year, you could “bunch” multiple years’ worth of giving into one single tax year. Bunching up your donations will then boost your itemized deductions to a level that exceeds your standard deduction. You’d then get to enjoy a tax deduction on a good chunk of your giving.

Now, to make it so you don’t have to give it all away in one year, you might consider making your bunched donation into a Donor-Advised Fund (DAF.) Once the money is inside the DAF account, of course, it’s no longer your money. But, as the advisor of the charitable fund, you get to direct the donations to your chosen charities over time. And, while you’re slowly doling out the money, it can stay invested and grow. It’s kind of like having your very own foundation.

Michigan is now in the final year of its shift in how retirement income is taxed. It only took four whole years. I guess time flies when you are having fun!

To understand where we are today, it helps to remember how the system works. The new law – passed in early 2023 – wasn’t designed to replace the old law in one fell swoop. Instead, the new law acts as an overlay and gradually gets more generous. This means retirees get to calculate their taxes under both systems and then choose whichever gives them the lower tax bill. Over time, the new law slowly pushes the old system aside.

Like the old law it replaced, the new tax law is organized by birth year.

Group A: For retirees born on or before 1945, nothing changed. They can continue deducting their retirement income up to about $66,000 for single filers or about $132,000 for married couples. Retirement income includes things like pension benefits and IRA distributions.

For the 2025 tax season that’s now underway – which was officially the third year of the transition – the new law gives these next groups of retirees a deduction equal to 75% of the retirement income subtraction enjoyed by the older retirees in Group A. 

Group B: For retirees born between 1946 and 1952, the old law still offers a blanket deduction of $20,000 for single filers or $40,000 for married couples. This deduction applies against all of their income, not just their retirement income.

If their pension and IRA distributions are big enough, this group of retirees might use the new law’s deduction. If not, they’ll just take the old law’s blanket deduction.

Group C: For retirees born between 1953 and 1958, the old law also allows that same $20,000 or $40,000 deduction against all types of income – but with a major catch.

Their deduction is reduced by the taxable portion of their Social Security benefits as well as their personal exemptions. Except in a few rare cases, the new tax law gives them a larger deduction than the old tax law offered.

As you might have noticed, Group B and Group C will always live in limbo between the old law and the new law. If not for tax software, it’s a bit ugly.

Group D: For retirees born between 1959 and 1966, they get to enjoy the same 75% of the retirement income subtraction given to the older retirees in Group A for the 2025 tax season. This group has been growing in size throughout the new law’s transition.

For those born after 1966, they didn’t quite qualify to get any retirement income deduction in the 2025 tax season. But, starting in 2026, their wait is now finally over. They’ll just merge into Group D above.

Starting this year, the new law’s four-year transition is officially complete. Every retiree will now receive 100% of the retirement income subtraction that older retirees in Group A have long enjoyed. It really is about time! 

Q: I’m planning to leave some money to charities when I die. But now that I’m looking more closely at my estate plan, I’m rethinking how I’ve got things set up. I’ve got the usual retirement accounts and brokerage accounts. What’s the best way to think about splitting things up?

A: It’s good to think this through. You are likely realizing that not all assets are taxed the same way and there might be an optimal way to divvy up your wealth.

To start, your regular IRA accounts (that is, your non-Roth IRAs) have never been taxed. When someone inherits them, every dollar is going to get taxed eventually. Unless the account goes to your spouse, your beneficiaries would have ten years to distribute it all. Obviously, that reduces their inheritance.

But, charities are treated differently. They don’t have to pay any taxes. So, if you name a charity as a beneficiary of your IRA, that money won’t ever get taxed. So, retirement money is often the most efficient pot to leave to charity.

On top of that, your after-tax brokerage or trust accounts, as well as your real estate, typically get a full step-up in cost basis when you die. This means your heirs can often sell those assets without facing a tax bill.

Given all of this, the most tax efficient strategy is kind of straightforward. Consider tweaking your estate plan so that your retirement accounts are used to fund your charitable intent and your other assets are left to the people in your life. Uncle Sam will get far less.

Q: My husband and I just got our tax return back and were surprised to see an added Net Investment Income Tax. We also thought we were going to see the new senior deduction from the new tax law, but it wasn’t there. What happened?

A: It looks like you got hit by some “tax torpedoes.” They are triggered when your income crosses above certain levels and suddenly new taxes show up or deductions start to disappear.

For a married couple, the Net Investment Income Tax appears when your modified adjusted gross income exceeds $250,000. Once that happens, you get to pay an extra 3.8% on your investment income. Think of it as an extra tax on your interest, dividends, capital gains and rental income.

The new senior deduction works similarly. You could have gotten up to a $12,000 deduction for being over age 65. But, once again, it looks like your income wiped it out completely. The phaseout started when your adjusted gross income reached $150,000. 

Interestingly, there might be yet another torpedo that you haven’t seen quite yet. That’s your Medicare Part B and Part D surcharge, known as IRMAA. It’s sneakier. Instead of hitting immediately, it’ll possibly show up early next year.