Q: I read your recent column about Michigan’s new retirement income tax law. With the new law officially going into effect after the start of the 2023 tax season, should I file my taxes later this year?

A: You are right. Due to some esoteric legislative procedures, the new tax law didn’t officially become law until February 13, 2024, even though it was passed way back in March 2023 and applies to the 2023 tax season.

Given this, along with some very slow tax software updates, it may affect those who filed their state tax return before February 13th. Specifically, it impacts those born in 1953, 1954, 1955 and 1956.

Fortunately, the State of Michigan has said tax returns filed under the old law will be reviewed using the new law. You won’t need to file an amended return to get the new law’s benefits. If all goes according to plan, they will just send you a tax refund, if needed.

Q: We’re concerned with my mother’s ability to safely handle her online access to her financial accounts. We are worried about her falling for “phishing scams” that might allow a scammer to gain access to her accounts. What can we do to make things safer for her?

A: For uninitiated readers, a phishing scam is when you are tricked into giving out your login credentials or other personally-identifiable information. This could be a fake email asking for you to update your online profile or even doing a simple Google search that takes you to a fake website.

My general advice falls under the headings of training and prevention.

On the training front, I’d suggest you set up bookmarks on your mom’s browser that links her to the official websites for her financial accounts. Also, try to have her only use her iPad or iPhone’s official apps to get into her accounts.

One scam I recently heard about describes credible-looking, but fake, websites that trick account holders to sign in. When their login fails, it warns them that their account has been compromised and directs them to call for “help.” How would the account holder find such a fake website? By searching directly on Google for their bank or brokerage firm or by clicking a link in a fake email. Using the official app or by clicking on their browser’s bookmark can help.

On the prevention front, you might consider attaching your cell phone number as her two-factor authentication device. If she falls for a phishing scam, at least you’ll be there to block the attempt.

Finally, if she works with an advisor, see if they can set things up to prevent online money movements or trading activity. It’s possible to make her online account basically for viewing purposes only. When she needs to do something with her money, she’d just call her advisor.

For the 2023 tax season, Michigan has a new tax law for retirement income. It’s being “phased in” over four years. Let’s try to break it down.

Like the old law, the new law is based on birth years.

Group A: For those born on or before 1945, there is no change. These retirees get to deduct their retirement income up to about $60,000 (single) / $120,000 (married) for 2023. Think, pension benefits and IRA distributions.

This is where things start to get just a little more complicated.

Group B: For retirees born in 1946 through 1952, you get to deduct $20,000 (single) / $40,000 (married.) For tax season 2023, effectively there is no change, either.

Things still feel simple enough, so far.

Group C: For retirees born after 1952 and 1956 (to be included in this group, you must reach age 67 by the end of the tax year), you also get to deduct $20,000 (single) / $40,000 (married). But, there’s a catch! The deduction is reduced by the taxable portion of their Social Security benefits as well as their personal exemptions.

The “catch” adds a wrinkle of complexity.

Group D: For those born in 1957 and 1958, the old law provided zero deduction. For the 2023 tax season, they’ll benefit under the new law as shown below. Please note, younger groups will have to wait for the 2024, 2025 and 2026 tax years to see the benefits.

Up until now, I have been describing the old law. The reason for that review is the new law requires us to basically “overlay” it on top of the old law to figure out which is better. How’s that for complexity!

For the 2023 tax season, under the new law Group B and Group C will be entitled to 25% of the deduction amounts that’s been afforded to Group A all along. If the new law works out to be better than the old law, they can choose the new law’s “25% phased-in” deduction. That works out to be about $15,000 (single) / $30,000 (married.)

For Group B, the old laws’s deductions of $20,000 (single) / $40,000 (married) are clearly better than the new law’s 2023 phase-in deductions. 

For Group C, the old law had that “catch” (see above to review.) As a result, the new law might work out better for them. It all depends on the level of their Social Security benefits and retirement income received.

For Group D, the old law gave them no deduction at all. In this case, the new law’s deduction is clearly better.

Fortunately, next year we get to do this all over again! Except, at that time, we’ll have a “50% phase-in” to overlay on top of the old and we’ll introduce Group E into the mix. Thankfully, we can save that added complexity for another day!

Jason P. Tank, CFA, CFP® is the owner of Front Street Wealth Management, a purely fee-only advisory firm in Traverse City. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Q: Unfortunately, we just realized we totally forgot to pay our estimated quarterly tax payments last year. We’re afraid to ask, but how do the penalties and interest charges work? 

A: Things happen. Here is a quick rundown using rough figures for tax season 2023. 

The federal government is much more lenient than Michigan. The IRS’ combined penalties plus interest rate works out to about 8% on your unpaid tax that is due. Thankfully, your unpaid tax debt isn’t subjected to that rate for the whole year. You are only expected to pay your total tax due in quarterly installments, thus the name “quarterly estimated tax payments.”

Now, Michigan is downright mean if you fail to send in your estimated payments. The interest rate charged is also about 8% in 2023. But, if you didn’t send any of your estimates, they slap you with a huge add-on 25% penalty on each estimated amount that’s due. They will lower that penalty to “only” 10% if you paid even one tiny estimated tax payment during the year. 

Q: I’ve been holding a large amount of cash in my investment portfolio for some time now. Recently, I’ve been advised to shift some of that money into bonds. It makes me really nervous. Your thoughts?

A: Your bonds vs. cash conundrum is widespread. Your advisor is thinking soundly, in my view. Yes, today you can get over 5% on your cash with little-to-no risk. But, it’s logical to assume this won’t last. If you wait until interest rates start dropping, you might kick yourself for not locking in current yields.

If the economy slows with the continued slowdown in inflation, we should expect the Fed to cut rates. Many expect that to start as soon as their meeting in late March. And, markets are expecting that you’ll see rates about 1% lower by September. So, your advisor is channeling Wayne Gretzky by skating to where the puck is going to be, not where it is now. 

Q: We’ve done Roth conversions in recent years. Our motivation was to take advantage of today’s low tax rates. With the election looming and deficits booming, it seems like we’re headed for higher taxes. Is that a valid enough reason to keep doing Roth conversions or is there more to it? 

A: Roth conversion analyses require both financial know-how and a pretty good crystal ball. If your current tax burden is temporarily lower than it will be in the future, converting some of your pre-tax IRA balance to a Roth is a no-brainer. But, if you are purely focused on making a good guess about future tax hikes, things get more challenging. 

If forced to answer in a blanket manner, I’d err toward considering Roth conversions; when done methodically and in moderation. Our tax code is often quite complex and sometimes Roth conversions have unintended consequences. especially if not done carefully. This is fresh fodder for a future column.

Q: I’m turning 73 later this year and understand that I’m now required to take money out of my IRA. Should I do it right away or wait until later in the year?

A: Honestly, your timing for your required minimum distribution (RMD) is quite personal. The deadline for taking your RMD is technically December 31, but you can certainly do it anytime during the year.

If you need the cash for living expenses, I’d say just go ahead and take the money out of your IRA when you need it. If you tend to get really busy, near the end of the year, it might be wise to get it done earlier. But, if you don’t urgently need the money and usually donate to charity late in the year, consider satisfying your RMD in December after you’ve completed your direct-from-IRA donations.  

Q: We’re still not earning very much on our cash sitting in the bank. We’ve finally noticed some decent savings rates on CDs. Should we invest in them now?

A: The short answer is, yes, you should absolutely be earning interest on your cash savings. Luckily, you now have some choices.

Besides purchasing CDs at your bank, which can be convenient, you might think about transferring your surplus savings into a brokerage account. Money market rates currently sit at about 5.25%. With an electronic link established, you easily zap money back and forth between your brokerage account and bank account.

Ultimately, if you’re earning less than 5% on your cash, it’s time to act.

Q: Last year, I donated money directly to charities right out of my IRA for the first time. I’m unsure of how to get the tax benefits. Will my donations be included on my usual tax reports from my brokerage firm, or do I have to keep track of it all?

A: It’s fantastic that you’ve used the smart tax planning tool of giving directly to charity out of your IRA. With the standard deductions today, most people aren’t able to deduct charitable donations funded from their regular checkbook. Using your IRA is a great way to support your chosen charities and still enjoy a tax break.

Whenever you take money out of your IRA, your brokerage firm will provide you with a Form 1099-R showing you all the dollars withdrawn in the prior year. That’s true whether you donated every penny to qualified charities or happened to spend it all on a family vacation. If it came out, it’s shown on your Form 1099-R.

So, to get the tax break, it’s absolutely up to you to inform your tax preparer about your total direct-from-IRA donations. If you fail to communicate, or they don’t ask you, you could end up paying taxes that you don’t owe. And, that’s never good!

I’m in full Santa-mode. Believe it or not, I’m still making a list and checking it twice. Thankfully, I’m not talking about my last minute shopping. Instead, I’m reviewing my year-end financial tasks for my clients. Here’s some of what’s on my mind. It might prompt you to review your own list.

Tax Loss Harvesting: If you have realized capital gains this year and want to offset them, scour your portfolio for some losing investments to sell. For those who own mutual funds, look for December capital gain distributions that might have gone unnoticed. If you have an advisor, just ask them if some tax loss harvesting is right for you.

Roth Conversions: As a refresher, a Roth conversion is when you shift money out of your regular, tax-deferred IRA and put it into a forever, tax-free Roth IRA. You’ll want to consider a Roth conversion when you determine the resulting tax bill now will be lower than future projections. Obviously, figuring this out takes some analysis, but there’s still a little time before the end of the year.

College Savings: In Michigan, you get a state income tax deduction for the contributions you contribute to a college savings plan (known as 529 Plans.) If you don’t pay state income taxes (and many retirees don’t), you might consider gifting the money to your kids to help them save for their own children. Naturally, December 31st is the deadline for this tax year.

Property Taxes: This is not a real December 31st deadline, for most readers. If you don’t itemize your deductions, your property taxes aren’t going to show up on your tax return anyway. But, if you do happen to itemize or if you own a rental property, you should talk to your advisors to see if prepaying your property tax bill is a good tax planning move.

Contributions to IRAs or HSAs: Here’s some relief, you don’t have to worry about December 31st when it comes to making your IRA contributions or funding your health savings account. April 15th is your true deadline for these types of contributions.

Required Minimum Distributions: This is a very real December 31st deadline! Remember, required minimum distributions (RMDs) apply for anyone with an IRA who has reached age 73 or has inherited an IRA from someone else. Of course, the RMD rules for inherited IRA is more complex and is worthy of some tax planning.

IRA Charitable Donations: This one is really, really important. Charitable donations made directly from your IRA need to be completed by the end of the year. These charitable donations will count toward your required minimum distributions (RMD) from your IRA. But, not if a donation check is just sitting uncashed, it won’t count.