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.
