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Bogleheads on Investing with Jeff Levine – Episode 20

Post on: March 22, 2020 by Rick Ferri

Jeff Levine CPA/PFS, CFP is my guest for this special Bolgleheads on Investing podcast. In this packed one-hour episode, we cover the CARES Act, SECURE Act, the new moral hazard in the rental real estate market, tax-loss harvesting, and tax-swapping. You’ll want to listen to it all – straight through to the end.

Jeff Levine is a Certified Public Accountant, Certified Financial Planner, financial adviser, and a complete tax nerd. He is the lead financial planning guru for Kitces.com, home of the popular Nerd’s Eye View blog, and the founder of Fully Vested Advice, Inc., which provides financial education and consulting services to industry professionals. He is also the Director of Advanced Planning at Buckingham Strategic Wealth.

Jeff regularly appears on CNBC and Fox Business and is a frequent guest on nationally syndicated radio shows and podcasts. He is an accomplished author including contributing to Kiplinger, Market Watch, several books, and is often quoted in the country’s leading financial publications, including The Wall Street Journal, The Street, InvestmentNews, and more.

You can discuss this podcast in the Bogleheads forum here.

Listen On


Rick Ferri: Welcome to Bogleheads on Investing, podcast number 20.  Today I am happy to have Jeff Levine, a tax expert and a financial adviser. And we’ll be talking about the CARES Act, the SECURE act, and tax loss harvesting.


Hi everyone. My name is Rick Ferri and I’m the host of Bogleheads on Investing. This episode as with all episodes is sponsored by the John C.Bogle Center for Financial Literacy, a 501c3 corporation. Today my special guest is Jeff Levine. Jeff is a certified public accountant, a certified financial planner, and a nationally recognized thought leader on tax issues within the financial planning community. Jeff is the lead financial planner nerd for Kitces.com, home of the popular Nerds Eye View blog and the founder of Fully Vested Advice Incorporated, which provides financial education and consulting services to industry professionals. He is also the director of advanced planning at Buckingham Strategic Wealth. So with no further ado, I am very happy to have on our show Jeff Levine. Welcome Jeff.

Jeff Levine: Thank you, thank you for having me.

Rick Ferri: Jeff you are a great resource for everything that’s been going on with various legislation and taxes and you are a bonafide tax geek and we’re really pleased to have you on the show today. Before we get into the nitty gritty details could you tell us how you became a tax geek?

Jeff Levine: Sure. You know I kind of by accident probably like most people who end up in taxes, I don’t think anybody grows up but like man I want to be nose deep in the tax code every day of my life, but it all started really by happenstance. When I was younger, my parents got divorced. My mom started looking for work and as it turns out I had gone to school with Ed Slott, who probably many of your listeners know.  I went to school with his niece.  His sister-in-law had said to my mother, “You know, I think he’s looking for an administrative assistant to secretary.” Something along those lines, and I was pretty young at the time. But my mom ended up taking that job and over the course of the year she’s actually become the managing partner of the firm, and has been for quite a while sometime.

Rick Ferri: For our listeners who don’t know, Ed Slott is probably one of the nation’s most respected authorities on individual retirement accounts and he gave you your first job, and I guess your first paycheck.

Jeff Levine: I mean Ed Slott’s father gave me my very first hundred dollar bill after working a week on school spring break, I think when I was like 13 or 14 years old. And you know when everybody hears that story and they also know that I worked for his Ed Slott and company for about a decade, they just kind of think like, “Oh, you know of course you were like anointed for birth to work there, and to, you know, like the boy king.” And it couldn’t have been further from the truth. I actually wanted to be a doctor from the time I was two until 21- 22, my senior year in college, and I spoke with a lot of doctors in the emergency room, and I had been doing EMS. And so I got very close with them and they all told me, “If you can find something else you love go do that.”

And so here I am trying to take their advice, I say, “You know what, I’ve always loved math. I enjoyed working with people and helping people. I’m going to become a financial advisor.” I’ve heard Ed talk about these people for years and how they can help people. That’s what I’m going to do. And so I started, and I called up and asked around a bunch of people who I trusted, they said, “You know, here’s a good company to go to and do your training with.” So I called them up and I got an invitation to come work with them. 

And the first week we went in and it was, you know, rah rah we’re going to help people, and I was all excited. Week two was an unbelievable motivational lecture, still probably the best motivational concept I’ve ever heard. For those listeners who are not familiar, it’s called 212 degrees. And the whole concept was essentially if water from 32 degrees on up to 211 degrees goes from cold water to hot water, but it’s still water, right, but you put in all this energy into the system, but by putting one extra degree of energy now you go from 211 degrees to 212 and you create steam, and you power locomotives and engines and all these sorts of things. So I’ve always asked myself whenever I’m not seeing the results that I think I want to see, am I at 211 degrees? Is it, am I just, you know, I’ve done so much work but just that one little extra bit. So that was awesome and as a science nerd also it really resonated with me and still stuck with me to this day so many years later.

Then week three was all about life insurance, which was fine. You have to understand the tools of the trade if you’re going to be a financial planner. But by week four it was great; you’re all experts bringing a list of a hundred people you know and let’s see how we can help them. Which of course, Rick, as you know, is let’s see how many people you know that we can call and shove product down their throat.

You know I had this real crisis of conscience.  I said, “What am I going to do. I can’t do this.” You know, how could I legitimately look somebody in the eye and say, “Trust me with your life savings.” when — because of my unique relationship, having known Ed Slott and the group of advisors that he was training — I literally knew like 300 people who were way more qualified than I was to do it. So I did something I almost never do. I quit and I said,  I’m sorry, this is not for me.” And I had no idea what I was going to do with my life. At the time I was actually thinking about going back to school for emergency disaster management and working with FEMA.

Ultimately I happened to go down and help my mother and Ed at a program they were having, purely for registration. They were just short on people and was sharing the story I told with you and an advisor and another table happened to hear me and said, “You know I happened to overhear you last night.” I work in a CPA firm and we do all the planning for that firm so we don’t have to hunt down people. There’s just plenty of people who need help and we just help the ones that want it, and would you like to come work with me. You seem like a nice kid, and a bright kid. How’d you like to come, move down to Miami and work with us in the CPA firm?

And so I went down to Miami and after about a year or so, it wasn’t quite what I had expected. So to end this very long story and kind of to get to where we are today.  So Ed called me up into his office and said,  “Would you like to, how would you like to work with us. Essentially like, we need some young blood here. You seem to have an ability to grasp the stuff. How would you like to work with us?” And, you know, when somebody who’s like the best in the country at something says, “would you like to work with me,” the answer is yes. Like I don’t care what they do. If they’re the best garbage man in the country I want to go work with them because I want to learn how to do things really well.  But I kind of took it as a challenge and went ahead and did that, and they were almost 10 years of the best years of my life. I mean it was a great learning experience.

But as I ventured out and created my own RIA about three and a half years ago, that began to take more of my time and I decided to ultimately Ed and I parted ways very amicably, we’re still great friends. So I went out on my own and shortly after that Michael Kitces, who I know you’re familiar with as well, he reached out to me and said, “Jeff I don’t know what you’re planning on doing, but would you like to do some stuff together,” and again, when anybody who’s a top in the country, and anything, and I think Michael really is the preeminent thought leader of our industry right now. When he says, “would you like to do something together”, the answer is yes. So Michael and I began to work there. I ultimately became the lead financial planning nerd – technically is my title over at that platform – and then after about three years the RIA had grown to the point where we really felt for Michael and I to be aligned and for us to have some more scale on the advisory side so Michael and I both left our existing advisory firms to team up. And so now I spend part of my time as the director of advance planning over at Buckingham Strategic Wealth of Buckingham Wealth Partners, and in addition to that I spend the rest of my time with Michael over on the Nerds Eye View platform at Kitces.com. I wake up every morning and I’m excited to go to work.

Rick Ferri: So let’s get into some tax stuff.

Jeff Levine: Sure.

Rick Ferri: So the most recent thing is the Coronavirus Aid Relief and Economic Security Act or CARES Act, which is a two trillion dollar emergency fiscal stimulus package. And it’s just loaded with all kinds of stuff so my first group of questions will be about the CARES Act and then we’ll talk about the SECURE Act, which was signed into law late last year, which changed a lot of things and then we’ll talk about tax loss harvesting, which is something Bogleheads have near and dear to their hearts. So I want to get through those three big things today and we’re going to do it in 50 minutes or less. So are you ready?

Jeff Levine: That’s a big ask, but let’s do it. Let’s try.

Rick Ferri: CARES Act, go!

Jeff Levine: It’s like, tell me the history of the world. So I mean I think the question that’s on most people’s mind is what am I getting? Like what type of  check am I getting? That seems to be the number one question people have asked so far. Am I getting a check, and once the answer is yes, how much is it?

Each adult taxpayer entitled to a $1,200 recovery rebate check as a starting point. Now I say as a starting point because we’re going to have to adjust this for some higher earners that are listening. But as a starting point, $1,200 to adult taxpayers. Single individual, $1,200 head of household, let’s give them $1,200, and a married couple who filed a joint return $2,400 for two times 1,200.

In addition to that, each taxpayer is also entitled to a $500 credit for each qualifying child. And qualifying child here is the same way as a child tax credit is qualified for. So we’re looking for children under the age of 17 here, so 16 and under. And there’s an additional $500 there. So for argument’s sake a married couple with a joint return who have three children would be entitled as a starting point to a thirty nine hundred dollar recovery rebate check.

Rick Ferri: Are these checks actually going to be coming in the mail? Are you getting a credit against your income tax as when you file your income tax? How is it going to work?

Jeff Levine: So it is considered a credit against your 2020 taxes. The easiest way I can think about explaining it is imagine that the government is pretending that everybody who’s entitled to their rebate check paid that amount in for their 2020 taxes already on January 1st of this year and now they’re just refunding it back to you. They said, “Oops, you paid too much. Here’s your own money back.” That’s the simplest way to think about this in one’s mind.

Now in terms of how those checks are actually going to be processed it’s going to vary. So for individuals who are receiving Social Security benefits, the likelihood is that those checks will be processed or those distributions will be processed to the account into which they’re getting their Social Security payment. For individuals who have a direct deposit account on file with the IRS from either their 2018 or 2019 tax return, whichever is the most recent, then those direct deposit accounts will receive that rebate, and then for all others it will likely go to the address of record where you filed your last tax return.

And notably you know there are some problems here. For instance somebody who had a refund in 2018 that was processed, that might have been over a year ago already and what if they closed that account? Like what happens? Where does that check go? Or what if somebody moved from the last time they filed their tax return? In that second instance there is actually a remedy, something I would encourage your listeners to do right now if they’re thinking they may get a check, is go online print out IRS Form 8822, form 8822, and what that is it’s just a simple change of address form with the IRS. It says to the IRS like, “Hey you know you have my old address, use this one going forward.”  And that would be a good way to make sure that your check, if it’s going to be a check, goes to the correct place.

Rick Ferri: So this is a 2020 tax refund but of course you’re not filing your tax returns until 2021. Now some people have already filed their 2019 taxes and some people have not yet so there must be some sort of a strategy here. In other words if your income for 2019 is lower than your income for 2018 you probably want to file your tax returns especially if you want to get it below the hundred and fifty thousand dollars for married filing jointly or less than that if you’re single, correct?

Jeff Levine: That’s exactly right and the reason that’s important is I think you just hit on it. So we talked about a starting point before, right, for those checks. But as income exceeds certain thresholds, notably as you mentioned, for married couples filing a joint return 150,000 for single file for 75,000 and for head of households 112,500 dollars. As your AGI for those applicable years, 2018 or 2019, exceeds those amounts, the recovery rebate check that you get now or recovery rebate direct deposit, whatever you want to say, will be lowered by five dollars for every hundred dollars you’re over those thresholds. So as you mentioned, if your income is lower in 2019 then it was in 2018, it very well may pay to file that 2019 return to get that on file with the IRS so they use that as the number to base this recovery rebate to credit on.

Rick Ferri: What if it’s the case where in 2018 that person didn’t make that much money but in 2019 they made a lot of money but they already filed their return. Can they pull it back?

Jeff Levine: Unfortunately I don’t see a way for you to pull back that.

Rick Ferri: I didn’t say with me.[Laughter] It is not me but I was saying, boy if this person did not file their 2019 return they would have gotten a larger check by waiting but apparently you’re saying they can’t pull it back.

Jeff Levine: No, once that return is submitted and it’s on file with the IRS. Yeah you know and I and the last thing you wanted to do is do anything that is fraudulent on a tax return. I’ve heard some people who said, “Oh you know what I’m going to do, I’m just going to report one dollar of income for 2019 on a tax return. This way I get my recovery rebate check, and then I’ll just amend my return later.” That’s still filing a return, and when you file your return you’re saying under penalties of perjury that the information on there is true to the best of your knowledge. And so that is not something you want to be doing right now.

If your return is on file, unfortunately you know you should have procrastinated more. You know being a procrastinator really helped with the CARES Act in a lot of ways. For instance one, as you just mentioned, the other one is if you didn’t take your 2019 RMD as a first year person who has RMD’s, in other words you turned 70 and a half last year, and 2019 this year you can actually wave two of them. It’s I mean they’ve rewarded procrastination in this law it’s very strange.

Rick Ferri: Now let me ask a question about that because you hit upon I know you were getting ahead, one of the other provisions of the CARES Act is if you are 72 and a half or if you’re 70 and a half and you started taking required minimum distributions and therefore you would have to continue taking them, that you can skip a year. But what if you  already took it for 2020.

Jeff Levine: This is a tough one. So first off let’s start with the easy answers .If you were a beneficiary, a non spouse beneficiary, like you had a parent or grandparent who left you an IRA or a 401K, and you took that distribution you are just SOL as they say, right. There’s nothing you can do to fix that, you’re out of luck unfortunately.

For owners of an account like an IRA owner or 401k owner, there’s a couple of ways which this may be fixable. The first and easiest way it could be fixed is if you happen to be within the 60-day window, which essentially means at this point you took your distribution from the beginning of February on forward, roughly. If that’s the case then if you’re within the 60-day window and you’re not violating the once per year rollover rule which means if it’s coming from an IRA, you haven’t done an IRA – IRA 60-day rollover within the past 365 days, then you can simply roll your distribution back in. Normally you can’t rollover an RMD, but this isn’t an RMD; they just said no RMD for that year.

Rick Ferri: So that’s very interesting. I can actually say, “Oh no. No, this was not my RMD. That was just a rollover. I can put it back into the account within 60 days and then I’m good.”

Jeff Levine: Yes, yes, that would be the simplest way. There is a more complicated way for those who may be outside that 60-day rollover window and that’s by using a separate provision of this CARES Act which created what’s called a coronavirus distribution and we can kind of get into the details of that later but one of the key points of a coronavirus distribution is that you have up until three years after the distribution to repay it. So you have to qualify for coronavirus distribution, which essentially means you or someone you know either you or someone that’s a member of your house dependant, your spouse contracted the coronavirus, or you had some sort of  financial hardship because of it related to your work, so you were furloughed, you lost hours, business closed, something along those lines. And I think the way it’s written, I think IRS means for this to be interpreted fairly liberally. And if you can kind of force that distribution into this coronavirus related distribution box if you will, then again, you have three years from the date you took that distribution to pay it back. So those are two ways you could potentially fix an unwanted quote-unquote RMD that is no longer really an RMD for this year.

Rick Ferri: Okay let me ask one last question about this and we’ll move on to the next thing. That is that I have a lot of clients who take an RMD monthly, so they started taking it in January, they took it in February, they took at the beginning of March before this law came out. Can they stop or do they have to take their full distribution. In other words, once you begin to take it for the year do you have to take the whole thing or can you stop right now?

Jeff Levine: You absolutely do not have to continue taking it. And here’s the thing. Normally there’s, well not normally, but there is this once per year rollover rule. There may be ways to help resolve that for individuals. For instance two suggestions I would have. One is if this distribution came from a  plan and let’s say you took a February 15th RMD and a March 15 RMD and you’re listening to this today, and whatever today is as you’re listening to it, you’re within 60 days from both of those distributions. If they came from a plan like a 401K they can actually both go back to an IRA. The once per year rollover rule doesn’t apply to plan to IRA distributions. 

The second thing would be let’s say this did come from an IRA, which is very likely because a lot of people end up rolling over their dollars to IRAs later on for more flexibility in terms of investments, etc., more control. If it is the case that those February 15th and March 15th distributions already occurred and let’s just say hypothetically today is you know April 3rd, we’re still within sixty days. Then one of those distributions could go back into the IRA you took it from or another one.

The other one you could convert because an IRA to a Roth IRA conversion, like via a 60-day rollover, from the IRA to the Roth IRA is also not considered part of the once per year rollover rule restrictions. So yes, it still means it’s taxable, but now at least it’s growing tax-free in a Roth IRA. So there’s another way to potentially go about that.

Rick Ferri: Let’s talk about the unemployment aspect of it and something that’s pretty interesting besides going in and getting basic unemployment benefits if you get laid off or furloughed or you’re out of work because of this. There’s a couple of interesting things about the CARES Act. I’ll say them both here but number one is it’s you’re eligible for it if you’re self-employed and secondly everybody gets an extra $600 per week. So why don’t you tackle the $600 one first and then talk about the unemployment benefit for self-employed people, which normally you don’t get.

Jeff Levine: That’s absolutely correct. So in terms of the extra $600, first off I would say when it comes to unemployment, as a general rule of thumb, with this bill just think it’s bigger it’s longer and more people qualify, right. It’s like unemployment on steroids. With that said, the unemployment of $600 really what they were looking for is like, hey we’ve got to replace more of someone’s regular income because, believe it or not, the average unemployment today across the nation– and unemployment I should mention is a very fractured system–unemployment is not a federal benefit that is typically offered. It’s a state benefit that now the federal government is going to help fulfill and to backstop in terms of the finances of it. But each state has its own unemployment rules and time frame for how long they may last, an amount of money, but the average unemployment across the US is only about $385, so less than $00. Let’s just call it even $400.

Per week that’s not going to be enough to support most families getting through this tough time. So by adding the $600 now we’re up to $1,000 a week, a meaningful amount that again, at least has the ability to help make sure that most people can pay the immediate bills that they need to pay in order to continue to exist during this really unprecedented time. Notably that $600 plus the $400, so let’s call it $1,000 for roughly the average payment that someone would receive under these unemployment provisions, is more than what some people make on a regular basis. And so that was one of the holdups, very temporarily albeit, but there was a temporary hold up because there was some debate in the Senate as to “is this right, should we actually incentivize people to collect unemployment and make more money rather than go back to work and earn less.” And ultimately they came to the decision that it would be too challenging to do this separately, one off for each state, because again, each state has different programs, and that may ultimately be the result of what happens but it’ll be a small percentage of people and of those it applies to only a small percentage will likely take advantage of the system that way.

Now with regard to the second part of the question, or really the first part but kind of circling back to that first part about self-employed individuals, you’re right because unemployment means like you typically don’t get an unemployment unless you’ve been fired or let go, and you can’t do that to yourself if you’re unemployed. I mean otherwise any time a self-employed person wasn’t having a good run of it they would just say, “You know what, I fired myself. Let me collect social, you know, some unemployment insurance.”

However in disasters we very frequently see legislation coming about that creates an unemployment fund for individuals who are self-employed because they are also impacted and that’s exactly what we see here. So there’s a special provision of this law called Pandemic Unemployment Assistance, and Pandemic Unemployment Assistance is basically a catch-all provision that says if you don’t qualify for unemployment compensation for some other reason, i.e., maybe you’re self-employed, then you will get an equivalent unemployment compensation check via this Pandemic Unemployment  Assistance program.

Rick Ferri: I just want to clarify one thing. If it’s a couple and both spouses are unemployed now, one of them may have been self-employed and have lost business and the other one was employed and lost their job. They both can collect unemployment, and they both can collect the $600. Is that true?

Jeff Levine: Generally speaking the answer would be yes but I would say that the other thing to keep in mind is you always want to know what your state laws are for unemployment assistance unemployment compensation because at the heart of it there’s a lot of state law that goes into this. Now certainly if you didn’t collect unemployment because of state law, you should be able to potentially qualify for that same Pandemic Unemployment Assistance program that we had just referenced.

Rick Ferri: So I just want to clarify one thing. If I’m self-employed, am I only going to get the $600 that the federal government is giving me, or am I also going to qualify for state unemployment insurance which I normally wouldn’t get?

Jeff Levine: So you will ultimately qualify for what amounts to your state, plus the federal 600, but it may all ultimately be administered to you via this federal Pandemic Unemployment Assistance Program. The state is not creating an unemployment compensation fund for self-employed individuals, but the net result to someone is the same as if they would have gotten the state check plus a federal check.

Rick Ferri: Let me ask an investment question because this has been asked to me already a couple of times. Part of the provision of the CARES Act is someone who is paying rent can stop paying rent. And I don’t know under what circumstances they can stop paying rent and they will not be evicted. And since the courts are basically closed, even if you wanted to evict them as a landlord you could not.

Now you could talk about that but since this is an investment show I’m going to look at the other side of that. The other side of that is a lot of people own rental property, they own a house, they own a couple of apartments, they own some condos, or whatever and they rent it out. Now I’ve already run into two people whose renters have said, “I’m not paying you okay, because of the new law.” What recourse would those people have because they still have to pay their mortgage on that property?

Jeff Levine: Absolutely. And the first thing I would make sure to caution listeners is that we’ll mention here what’s going on in the CARES Act, but it’s always important to check your local laws and see what’s happened there as well because property issues are often a matter of state law and governors etc. may have instituted certain emergency regulations that may supplement we’re about to talk about here. But in particular what the CARES Act does is it says that if an individual has a federally backed loan and there’s a forbearance there so if you’re pausing that essentially, then there can be a pause, if you will, of the renter as well paying that rent to the individual who owns that property.

In addition there’s also some rules in there that prevent individuals from what they call covered dwellings, which means that you’re getting help some way, shape or form from the federal government. So either you participate in any number of programs that are organized for housing or you’ve got a federally backed mortgage on the property either as a loan or as a multi-family loan, then there’s going to be certain restrictions on you being able to evict a tenant even if they’re not paying their rent at this point in time.

Rick Ferri: If your renters stop paying rent because they lose their jobs and you have a loan that is backed by some federal program and you’re the landlord you could go to your lender and get forbearance. So in other words, you could ask for leniency and delaying your own mortgage on that property.

Jeff Levine: Sure and many, many states have already done that as kind of a proactive measure too. They’ve just said there is a general moratorium on forbearance so you have to call your mortgage provider and do that. So it’s really worth checking out the rules where you are locally here, because again, this issue is so intertwined between state rules and the federal rules that we now have altered by the CARES Act.

Rick Ferri: The last item on the CARES Act that I’d like to address is the payroll tax and there’s two items here. Could you talk about those please?

Jeff Levine: Sure. There is one available credit that is for certain businesses who have really struggled, either parts of their business, or all their business has been essentially shut down by government order of one sort or another, or they’ve seen revenues from their business drop by more than 50 percent from the same quarter in the previous year. So for argument’s sake in Q2 of 2019 they had $100,000, they would have to have below $50,000 in Q2 2024 for that to kick on and for that credit to be available. But look, a lot of businesses are having a tough time right now and many of them have seen their revenues cut in in such a fashion so they would be eligible for a credit of up to 50% times the W-2 wages that they’re paying to each employee up to a maximum of $10,000 per employee. So that credit is for employment taxes only. So people need to make sure that this doesn’t, you know, they don’t conflate this with income taxes. This just applies to the employment taxes. So you know things like FICA etc. but still a nice credit.

Now for anybody who doesn’t qualify for that credit or even those that do but still let’s say owes taxes in addition to it there is another provision of the CARES Act that says the payroll taxes, again the employment taxes that you owe from now through the end of the year, you can delay those for a significant period of time, up to half of them can be delayed up until December 31st of 2021. So we’re looking at almost two years from now, and the other half can be deferred up until as late as December 31st 2022. So a really significant liquidity break. Now it doesn’t get rid of the liability for those companies. In other words, that’s a tax you’re still going to have to pay, but from a liquidity point, like if you need money now, that’s a nice way to help reduce your current expenses on your cash flow statement.

Rick Ferri: Okay this is the absolute last two questions on the CARES Act. When do I have to file my tax returns, that has all changed, and if I’m self-employed do I have to pay estimated taxes and that would include retirees?

Jeff Levine: So as it stands now we’ve seen a couple bits of IRS information and guidance and frankly I wouldn’t blame any of your listeners if  they were confused. We’ve, it’s been so piecemeal over the last couple of weeks, there has been kind of conflicting guidance out there simply because they put out one thing you know today, and two days later they change it. As it stands now, as we’re recording this, the tax filing deadline for individual taxpayers has been shifted out to July 15th of 2020, and that is also the payment date for taxes. So July 15th 2020 for both of those items. Two things I would note though for listeners. One is that your business returns if you didn’t do that, let’s say you had a S corporation or a partnership return. As of now they were scheduled to be submitted on March 15th of 2020 so if you haven’t filed an extension yet I would encourage you to do so immediately.  The other thing I would point out here is that a question that has come very frequently to me so far since this guidance was released was does this mean now that the extension for a tax return is January 15th next year in other words six months from the July 15th deadline and the answer is no. The extended deadline continues to be October 15th of 2020.

Rick Ferri: What about paying estimated quarterly taxes?

Jeff Levine: Sure. So self-employed individuals, really anybody who has to pay employment tax, excuse me quarterly estimated taxes, their Q1 is due on July 15th at the same time the 2019 income tax return is due. Now interestingly, you know some of your listeners who’ve been paying estimates for many years, they probably are thinking to themselves, but wait what about Q2’s estimate because isn’t that due June 15th? And the answer is yes, it still is.

It’s very strange. So this year you’ll be paying your Q2 estimate before you pay your Q1 estimate. But that’s just the way it is. Look, Rick, we need this employment guarantee for people of my ilk. Just there’s just always inventory when it comes to this stuff because the rules are just, you know, simplification is never simplification. 

Rick Ferri: Is there anything else we could add that’s important about the CARES Act for most investors, then we need to move on to the SECURE Act.

Jeff Levine: Sure. I would simply state that for those listeners who are business owners as well, and if you’re having a hard time there are a variety of loan programs that you may be eligible for through the Small Business Administration in particular. So some of those in particular what’s called the Paycheck Protection Program is something I would HIGHLY encourage listeners to look at. It is an opportunity to get a up to a 10-year loan at a four percent interest rate, so very favorable interest rate over that period of time especially for a small business that is potentially  struggling. The loan will be a 100% backed by the Small Business Administration, and in particular if the loan is used for certain items in the first eight weeks following issuance of that loan so things like payroll etc., health insurance benefits for employees, that portion in the first eight weeks is entirely forgivable. so it’s as close to free money as one can get, in fact it’s so good even if they forgive the loan as part of that process in those first eight weeks for the specified expenses, then it’s not even included in your income. Normally discharging debt is included in taxable income. It’s not here, so I would strongly encourage business owners to look at these things. In particular again what’s called the Paycheck Protection Program, PPP, check it out. 

Rick Ferri: Yeah and unfortunately I was just reading today that one of the states had stopped taking applications because they’ve been overwhelmed, which I would understand why. Okay then we need to get on to the SECURE act which happened back December. What are the highlights?

Jeff Levine: Well I think the biggest highlight for those who are savers and who have for many years planned on leaving IRA 401k, a 403b and retirement assets to children, grandchildren etc, is that the stretch IRA has been eliminated for the majority of beneficiaries that are not a spouse. In short, the previous law allowed individuals who are named on a beneficiary form to take small distributions over the course of their lifetime. And that meant, in general, you know, for even middle aged individuals, fairly small distributions. For argument’s sake a forty-year-old has an IRS given 43.6 year life expectancy, meaning that they would have to divide their account by 43.6 and take that as a requirement of distribution that year. That at age forty you’re talking about taking like two-and-a-half percent of the account. It’s a really small percentage. So many individuals not only had small distributions for years, but in addition to that they were able to see their account grow. You know you did better than two and a half percent when you’re only taking out two and a half percent your account’s bigger the next year.

Now the SECURE Act says with the overwhelming, I should say rather with very few exceptions the overwhelming majority of beneficiaries that are not a spouse will now have to take everything out of the inherited IRA, inherited 401k, etc within ten years after the year of death. So really compressing the time over which those distributions must occur. And just for your listeners’ sake, they’re probably wondering, “well Jeff you said you know a very limited number of beneficiaries, but what are they, what are those groups.” Well it’s a spouse which we’ve already said. It could also be a disabled individual, which is defined under in law essentially as someone who can’t work at all, unable to engage in any substantial gainful activity, is the term. A chronically ill individual. So those are the individuals that typically can’t do two out of six what are known as activities of daily living–so eating, bathing, going to the bathroom, transferring those sorts of things on their own. 

The fourth group would be any individual who’s not more than 10 years younger than the person who died. So if you leave it to a brother or sister and they’re you know three years younger, they can stretch but they’re not really getting many more years as they were only three or four years younger than you to start with. And the last one and the one that causes the most confusion is the decedent’s minor children. Now note, Rick, I said the decedent’s minor children, not minor children in general. And that’s been one of the confusing areas that I’ve seen since the law was passed, people thinking any minor child qualifies. It’s only if the person who died left it to their own minor children, and they only get that break of not having to take it out over ten years until they reach the age of majority.  Once they hit age of majority the ten years starts then and they have to take it out over that ten-year period.

Rick Ferri: So I’ve been working with a lot of clients on trying to figure out how to stretch this IRA, and one of the things I came up with was if you are a spouse or you’re a couple and let’s say you each had equal IRA but you really didn’t need the required minimum distributions on it to live because you had other money, that you might want to in each of your IRA account you might want to name the children, name the children as the beneficiaries instead of the spouse as the beneficiary. Therefore if it’s a husband and wife and a husband dies younger, which historically has been the case, the children would get the husband’s beneficiary in which they would have ten years to take the money over that 10-year period of time, and then though the wife lives another ten years and then she dies and then the children get the second half of it and they take that over another 10 years. So actually you’ve been able to stretch it out over 20 years. 


Jeff Levine: Absolutely, and one of the things that I would also say is people may run into pushback sometimes if they look to do that now, and say maybe the spouse says, “Well what if I need the money.” Well no big deal. You can kind of have your cake and eat it too here. You can name the spouse as the primary beneficiary, name the kids as contingent beneficiaries and people should always have contingent  beneficiaries on their beneficiary form. And if at the time  the first to die spouse passes away, the surviving spouse says, you know I really don’t need that money, then they can disclaim it. In fact they can disclaim a portion of it and whatever they disclaim is essentially the legal equivalent of playing dead. That money will then pass down to those kids who will get the ten-year window at that point but that absolutely a great way to extend, and artificially create a longer period of time to take that distribution out. 

Another way, potentially, to do that would be just, you know, to have more beneficiaries instead of naming the kids directly for fifty percent each. Let’s say there were two kids. If each of those two kids had two adult children of their own, so talking grandparents here doing this for their children and adult grandchildren, maybe they decide to do 30 percent to each kid and then 10 percent to each grandkid as an immediate way to pass assets. Simply to spread that income out over more returns. In other words, if I can’t make more years to spread it out over, I’ll make more returns to spread it out over to keep that tax bill low.

But a lot of different ways you can go to try and mitigate the impact of this SECURE Act for sure.

Rick Ferri: One of the other things we discussed was if you have one child who has is doing very well financially making five hundred thousand a year and you had another one who decided to go into a non-profit and you know is making a much much much lower amount, and is in a much lower tax rate, that you leave other assets, after-tax assets to the one who is making half a million a year and you leave the IRA retirement assets to the one who is only making thirty or forty thousand a year because they’re in a low tax bracket. So you could equal that out somehow but that would keep more wealth in the family overall based on how you distributed your assets.

Jeff Levine: Yeah absolutely. It’s another great way to go, and certainly even for those who really want to force the stretch, let’s say they’re “I really wanted my kids to stretch,” there’s even though a potential way to artificially recreate that. Potentially, for some individuals using what’s called a charitable remainder trust, essentially leaving your IRA to a trust where when the beneficiary of that dies the rest goes to charity. But during their lifetime they can take an income stream from that trust and it can replicate to a large degree for certain individuals the benefits of a stretch IRA.

Now obviously there are some downsides to it as well that people need to be aware of. For instance, if the beneficiary of that trust dies relatively young a lot of those assets could be quote-unquote lost to charity, which is it’s not the worst thing in the world from an altruistic standpoint, but from protecting one’s family might have some consequences. So there’s at times a need for generational planning. But this is what I would encourage your audience to do, and is simply to talk with a knowledgeable professional. Like if this is something that you’ve done your entire life and worked and built up a million or two million dollars, or whatever it is, that’s a lot of money to you and you want it to go to your kids or other individuals and you want it to be as tax efficient as possible, take a few moments, get a little bit of information and/or read up, you know, simply read up. There’s lots of resources out there. I think I’ve probably written a hundred thousand words on the SECURE Act already on our kitces.com website. So there’s plenty of information out there. That just makes sure that you’re looking at this because it’s a big deal. It’s a big deal and the bigger your retirement account the bigger the potential issue is an impact is for your beneficiaries. 

Rick Ferri: Okay one more item on the SECURE Act is it pushes the required minimum distribution age out to age 72. Any comments on that?

Jeff Levine: Sure, yeah. That’s precisely correct, that we get a deferral of the required minimum distribution age. Now notably those who turned seventy and a half last year, were going to have to just continue to take an RMD this year in 2020. Of course now the CARES Act, which we just discussed, kind of supersedes that, and so now they don’t have an RMD this year either. If people want to know “what does this actually mean to me?” Very simply here’s what it is.

If your birthday is January 1st to June 30th so you’re a first half of the year birthday, then you start taking RMDs now under the SECURE Act two years later than you would have if the SECURE Act had not passed. And if your birthday is in the second half of the year then you push back your RMDs one calendar based on what it would have been had the SECURE Act not passed.

Now I will make one other important note here because it comes up often and Rick, I know a lot of your listeners are very charitably inclined and some of them may look to use their IRA to make those so-called qualified charitable distributions when they send certain money from their IRAs directly to charity. It’s a fantastic tax efficient way of supporting the causes that you’re passionate about. That date did not get pushed back until the age 72 date along with the RMD’s, it is still 70 and a half years of age. Now obviously someone at seventy and a half doesn’t have an RMD anymore, but if you want to give to charity that’s still a very tax efficient way to do it, and you can still do it from your IRA at age seventy and a half. Once you hit 72 then it will also begin to offset your RMD at that time as well.

Rick Ferri: And you can do Roth conversions between seventy and a half continue just like you would normally before you were seventy and a half. You can do those up until 72 also.

Jeff Levine: Exactly and this year for anybody because there’s no required minimum distribution. Normally, as you know, you have to take that required minimum distribution first and then you can kind convert anything above and beyond that if you want. Which has the effect of essentially pushing your income up first and then saying, well if you want more income above and beyond your RMD sure you can add that on this year. You don’t have that to worry about so maybe that’s the answer for some people. Instead of taking their RMD as normal, just convert it to a Roth and you’re in the same tax situation as you normally would. Except now you’ve got a pile of money growing tax-free forever and ever for you and your beneficiaries.

Rick Ferri: So it seems to me that you’re in a really unique situation if you’re maybe 71 years old, where this year you don’t have to make a required minimum distribution. You could donate a hundred thousand dollars of your IRA to charity and you wouldn’t have to pay any taxes on that distribution and then any other amount you could take out you could put it into your Roth and I imagine that’s true for if you’re 75 or 76 years old.

Jeff Levine: Absolutely you get to do, you have like free reign essentially over your IRA this year. You can decide how much to give via the QCD up to that hundred thousand dollar amount, and at the same time you can do a Roth conversion and you can do it at any order. You could do ten thousand Roth conversion today, a five thousand dollar QCD later this year as long as you’re just limiting yourself to the hundred thousand dollar QCD amount at some time, you could choose whatever you want, it’s fantastic. A lot of flexibility that’s offered in this challenging time, right, no one would choose to have the reason for these special rules apply but since they do we might as well use them to the best we can.

Rick Ferri: Let’s talk about something that Bogleheads talk about all the time on bogleheads.org and I had a lot of questions about this one. I announced that you were going to be my guest and it has to do with tax loss harvesting and tax swapping into a similar security and what does the IRS mean by substantially identical securities.

Jeff Levine:Boy I wish I had a really clear cut like super knowledgeable answer that said you know back in 1982 the IRS put out a notice about that. Unfortunately you know this rule has been on the books for a long, long time and it is still very gray. Frankly I think we’ve seen a further complication of the wash sales rules in the age of ETFs, right? Because in a world where you sell let’s say Microsoft and you buy Google like you could find a fairly similar company but there’s enough different dynamics with an individual stock, and you could make a pretty good argument for not substantially similar in most instances.

When it comes to an ETF, for argument’s sake, and-

Rick Ferri: Now hold on a second, you have actually used a different phrase. The IRS talks about substantially identical, you said substantially similar, that is actually used in a different part of the tax law and I think that is part of the confusion by the way.

Jeff Levine: That’s a fair point. That is, that you’re correct to point that out exactly. That it is substantially identical.

So I would say that the ETF, the issue that’s risen up with a lot of people is if I change my S&P 500 ETF for a S&P 100 ETF is that substantially identical? And there’s really not a great answer because, again you’d say that it’s significantly different. You’re only having a hundred companies versus 500, or roughly, right. It’s slightly more than 500, the S&P 500. But that’s if you look at how they track one another and the correlation, they are really, really close in many instances, and so IRS, I could very easily see the IRS coming in and having that argument to say like, look you have a 98 percent correlation, just hypothetically speaking, and how could you say that these aren’t substantially identical. Ninety-eight percent correlation is basically the same correlation. You’re really essentially buying the same thing just with a different name on it and so my view tends to be a little bit more conservative here.

Of course, this goes against the whole wash sale principle, right. Like a lot of times people, or the idea of what people are trying to do, the whole point of what a lot of times people are trying to do here is to buy something that’s really close, that does replicate the same sort of investment performance because you’re getting rid of something but you may have wanted it in your portfolio, you’re only selling it to get the loss. So you want to replicate it with something that would mirror it as closely as possible, but by doing so you may be subjecting yourself to a greater risk of having that loss disallowed if the IRS were to examine your return.

I will say this, that it’s better to give yourself more distance. We’re talking about a period of 30 days and I know right now is may not be the best time to talk about how much will things change in 30 days because, my goodness, how they changed in the last 30 days from when we’re recording this. But in general those things tend to work themselves out. I would just buy something that’s clearly different and has a difference that doesn’t track very closely the index that you were holding before. I’m a little bit more conservative on this than some of my colleagues.

Certainly going from company A S&P 500 to Company B S&P 500, that’s going to be substantially identical. I don’t think there’s any question about that. But in terms of let’s say going even from like equal weighted to cap weighted, the more distance you put between yourself and the previous position you solve for this 30-day period the better off you’re going to be.

Rick Ferri: I will be a little bit more liberal in my interpretation. Now I’m not a CPA but I am an investment person and I’ve studied indexes and I’ve studied ETFs and I’ve studied index funds so my interpretation is different. If you have Vanguard issuing an ETF that is tracking the CRSP total market index and Vanguard is the issuer of that ETF and the market goes down 10% and you sell that Vanguard total market ETF that is tracking this CRSP total market index and you turn around and you buy an iShares that is issued by a completely separate company, completely unrelated. The index they follow is a completely separate total market index, which is the S&P total market index and completely unrelated to the CRSP index. They’re different index providers.

Yes they are almost all the same securities that it’s at the issuer level it’s not substantially identical. Vanguard is not iShares, just like Ford is not General  Motors.They both make cars, in some cases they both make almost the identical cars, but when you have two completely separate unrelated issuers that are tracking different indexes, even though the indexes are very similar, they are not substantially identical. That’s my view as a guy who has studied indexes and studied index providers and indexing methodology. The methodologies of how the indexes are constructed are not substantially identical. So I mean that’s my deal.

Jeff Levine: So I would respond to that with a few things. First off, if I was going to court and I had to argue this before the IRS I’d certainly make that argument and I’d also have you hired as an expert witness to explain why that is very different. So that’s the first thing, right. Get your, you know, ducks in a row and have the right team.

But the other thing I would say is I think part of this also comes down to just the practical element of this, right. If you’re selling a really small position in your portfolio, when you’re looking to claim a two or three thousand dollar loss and at the end of the day if that got disallowed by the IRS it’s not going to be the end of the world. On the other hand if you were selling a big position that you had purchased and we’re talking about the difference of being able to claim a hundred thousand dollar loss or something like that then maybe that’s where you tend to be a little bit more–and I agree my position is a little bit conservative, I will admit that– but as someone who doesn’t want to be on the other end of the IRS disallowing that and popping the person’s income up a hundred thousand dollars and seeing Medicare Part D and Part D premiums inflate and all the other nasty things that come along with it, I’ve grown a little bit conservative in that element.

I will mention one other thing about the wash sale rule, which I don’t often get a chance to talk about so it’s great to be chatting about this today. And that’s the number one thing that you should be most careful of. If you’re looking at wash sales is to avoid selling the position inside your taxable account and buying it back in your retirement account. That is a really big no-no because if you violate the wash sale rule in your taxable account and you buy it back there, as you well know, Rick, you’re just adding to your basis in the second purchase. So you’re ultimately going to be able to benefit from your basis and the amount that you spent on the various positions at some point or other, you know many years potentially in the future when you ultimately sell,but it’s not lost forever.

If you sell an investment in your taxable account and you buy it back in your IRA. That loss is actually lost forever.  A Revenue Ruling out on this and a Revenue Ruling applies across the board to taxpayers. And I will say this, your listeners may be wondering how are they going to know.  And there’s actually a great article, I don’t remember whether it was the Wall Street Journal or maybe the Washington Post when this came out. They interviewed one of the old IRS commissioners and he said, “I have no idea how they ever even know that.” Okay, but it is the rule, and you’re supposed to follow the rule, and not what they catch you breaking against the rule.

Rick Ferri: Follow the rules–one other point about that–if a spouse buys it in their IRA within that thirty day period it is still a wash sale.

Jeff Levine: Indeed.

Rick Ferri: Jeff, is there anything else you want to talk about? We have room for just one more item.

Jeff Levine: I would just encourage everyone at this point in time, you know this may be a challenging year for a lot of individuals with income. If you’ve got savings put aside and you’re living off that savings, and your income is down this year, this may be an opportune time to look at doing Roth conversions while your income is lower than it otherwise would be. And certainly I would just say that with a few moments we have left I know this is a challenging time for everybody. I hope that something here was of value to you today, and I certainly wish nothing but the best of health and happiness for everyone listening. And I really appreciate the opportunity to chat with you and your listeners today, Rick.

Rick Ferri: On behalf of the Bogleheads we greatly appreciate you being on the show and hope to have you back again sometime soon.

Jeff Levine: It’d be my pleasure. Have a great day.

Rick Ferri: This concludes the 20th episode of Bogleheads on Investing. I’m your host Rick Ferri. Join us each month to hear a new special guest. In the meantime visit Bogleheads.org and the Bogleheads wiki, participate in the forum, and help others find the forum. Thanks for listening.



About the author 

Rick Ferri

Investment adviser, analyst, author and industry consultant



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