Adapting and Investing – Part I

Blog post #446

To be successful at almost anything, you need to be able to adapt. This applies to individuals, families, companies and countries.

In the past months, we have all been forced to adapt and change. Going forward, we will all need to continue to adapt, innovate and change.

Though there has been tremendous loss of life, if you step back with a broader view, individuals and societies around the world have adapted incredibly quickly, in various ways and with differing levels of success, to the Covid pandemic.

If I had told you on February 1st that most of us would be working from home (and staying home!) during March, April, May and even into the summer, you would have not thought that would be possible or could work. Now, many companies are realizing that a certain percentage of their employees can successfully work remotely, and they are innovating to meet the challenges of the Covid era.

Our firm adapting

We hope working remotely is not a permanent requirement, but a choice that people and companies can make. For many years, we have had a team member, Michelle Graham, who has worked for us remotely very successfully, after she started with us an in-office employee.

As a firm, we had steps in place, which had been tested for many years so we would be prepared to work remotely, if needed. Fortunately, we have been able to handle this difficult situation very well, from an operational standpoint. We have received phone calls, done Zoom and phone meetings, placed stock and bond trades and managed your portfolios all from remote locations. With no problems or glitches.

Our firm: core principles

We continue to believe in many of the core investment principles we adopted nearly two decades ago, but we have also adapted and made changes throughout the years, as well as in response to this crisis.

In terms of fixed income investments, we have adapted and reacted quickly to change.

  • Our role is to purchase the optimal type of fixed income investments that we feel would be safe (you should be repaid the principal upon maturity), pay the best interest rate for a given maturity and we monitor the security while it is in your portfolio.

Covid and Fixed Income Impact

When the Covid crisis severely affected the credit markets in mid-March, we had a conference call with fixed income executives of our primary mutual fund company. As a result of that call, subsequent analysis and decisions, we sold many individual corporate bonds of companies that were previously considered safe, but in this new world, appeared much riskier. We did not need to act in a panic. We did not need to sell due to a need for cash or because we, or our clients, had used margin or leverage. We waited until prices improved. Over a period of weeks, we sold bonds that were held which the Covid crisis has impacted the most, mostly in the retail, hotel and energy sectors.

While we still believe in buying and holding individual investment grade corporate bonds, we reacted with thoughtfulness and conservatism. We decided to sell the bonds of companies whose financial situation appeared to be the most impacted by this crisis, especially where there was no real visibility of how or when these companies would recover. We hope these companies do recover. But given the changed circumstances, we thought our clients should be holding better quality fixed income securities. We adapted quickly and decisively, for you, our clients.

Municipal bonds and bond funds – other changes

Usually, municipal bonds are only purchased for those in the highest tax brackets (incomes above $520,000 or $625,000, single or married), and only for their taxable accounts. Municipal bonds are debt issuances of state and local municipalities, as well as colleges, hospitals, water and sewer systems, and other projects. The interest is not taxable by the US Government, which enables the issuers to generally pay lower interest rates than corporate bonds or bank certificates of deposits (CDs).

It is our responsibility to monitor and adapt to what the financial markets provide. Recently, in a major change, some high-grade municipal bonds are paying higher interest rates than CDs and investment grade corporate bonds.

  • If this anomaly continues, it is possible that we will be purchasing municipal bonds for clients in all tax brackets, not just for those in top tax bracket, which is something that we have rarely done in the past.
  • This is a decision that we will make based on what the financial markets are offering at a given date, which constantly changes. It is our role as your financial advisor to adapt to the financial markets and do what is in your best financial interest.

While we have generally used mostly individual bonds and CDs for larger clients in the past, another way that we are adapting to the new, Covid world is likely to be a greater use of bond mutual funds within your fixed income portfolio. We have always been strong believers in diversification in both fixed income and stocks….and we continue to believe this. Due to the greater credit risk that now exists in the economy, we feel that adding bond mutual funds, in addition to other types of fixed income investments, will provide clients with greater security and more diversification.

  • If you add to your portfolio or have other fixed income investments that mature, if we invest those funds into an existing bond fund, that may provide a greater return than if we buy a new individual fixed income security.

These are just a few of the ways that we are adapting and evolving, as we always have, to changes in the world and changes in the financial markets.

We know that the world has changed dramatically.  We are committed to adapting, which means continually evaluating our business, principles, investments and practices.  When needed or when it makes sense, we will adapt and change, if we feel that would be in your best financial interest.

As always, we are here for you, and family members or friends who could use our guidance and assistance during the crisis.

Thinking about risk

Blog post #445

I never know where the ideas for these blog posts will come from. That can be a little risky, as I need to develop an idea every week.

Early Wednesday morning I was on a phone call with Delta, to cancel a flight for a trip we were supposed to be taking for a family event that was to occur this weekend.

I was fortunate that my call was answered quickly and a very nice Delta employee was able to process the cancellation, which we had been unable to do online or via their app. As she was processing the cancellation, the woman asked how me, and my business, were doing. I told her how bad I felt for her, Delta and the other Delta employees, as they didn’t do anything wrong to cause the crisis they are now facing.

Then I realized that many Delta employees at all levels (executives, pilots, phone representatives, etc.) are likely facing a huge double whammy problem right now that could have been avoided.

  • Many of them likely didn’t manage their risk properly. Many of them likely took on way too much single stock risk, by owning lots of Delta stock.
  • This could have been avoided with proper advice and planning. At the same time when many of them could lose their income due to Covid-related job losses (or have their incomes reduced, if they are able to keep their job), they have incurred huge losses in their Delta stock ownings, which has been crushed. Double whammy of loss!! Ouch!

This got me thinking about risk. 

Some risk can be avoided. Some risk can’t be prevented.

Some risk can be minimized. But risk is always there.

Your risk needs to be managed properly.

Dealing with risk is vital. Helping you to deal with financial and emotional risk is one of our main roles and can be of great value to you.

We often talk about diversification and its importance. The examples below are real world and should be evidence of why you should not own a huge amount of any one stock, and especially if it is your employer. We have seen unexpected issues arise in the past that severely impacted one company, or an industry, or now with Covid, are impacting many different industries.

Delta: Is now down 63% from its 2020 high and was down 72% at its 2020 low.

Marriott: Is now down 40% from its 2020 high and was down 69% at its 2020 low.

JP Morgan Chase: Is now down 40% from its 2020 high and was down 69% at its 2020 low.

These are Covid related losses, and likely would not have occurred if not for this crisis. But there are many examples of companies and industries that have suffered great losses for all kinds of reasons, due to technological changes, bad decisions, product failures (think of the Boeing Max), or lack of keeping up with societal trends. Think of GE, Boeing and many large retailers. Some have succeeded, others have not.

The energy sector has been hurt over many years, which worsened due to the Covid pandemic this year. There are many far worse examples than this, but Exxon Mobil is down 53% from where it was trading in 2016, dropping from $95 to around $45 now.

What are the lessons from this?

  • Be diversified. Do not own too much of one stock and definitely not too much of your employer’s stock. Our globally diversified portfolios eliminate the risk of a concentrated portfolio, by providing lots of diversification. Our clients are very well diversified, both in stock and fixed income holdings, in numerous, structured ways.
  • People don’t think single stock risk or the lack of diversification will actually impact them. But it happens. Remember Enron? Lehman Brothers? Some “unexpected event” could cause a huge financial crisis at almost company.
  • Reaching for yield is a significant risk. If a stock or bond is paying a dividend or interest rate that is far above market yields, then there is much greater risk involved.
    • We have seen people buy stocks for the “great” dividend yield and then something happens to the company….and the dividend is cut or even eliminated…and usually the stock price has dropped as well.
    • This is why we focus on your goals and your overall portfolio, not on dividend paying stocks or the yield of your stock portfolio.
  • Overconfidence and not expecting risk to show up. You always need to be prepared for unexpected events and risk to show up, as we have experienced with the Covid pandemic.
    • You need to be prepared emotionally for stock market declines of 10%-20% within every year.
    • You need to be prepared for occasional major declines in stocks of 30-50%, which could take several years to recover.
    • This is why we focus so much on your overall asset allocation, on the mix of stock and fixed income, based on your specific needs, risk tolerance and time frame…so you will be able to handle these types of declines.
  • With the current Covid crisis….there is still a significant amount of risk (and unknowns) that remain. 
    • While segments of the stock market have made major recoveries from the March lows, there are still many unknowns related to the pandemic.
    • Will there be future waves of Covid-19 that return in the fall or winter, or later? How will localized outbreaks impact manufacturing, food production and other aspects of our lives?
    • What will unemployment look like going forward? How quickly or slowly will those now unemployed return to jobs, and at what income levels?
    • When will an effective vaccine be released that is proven to be effective on a mass basis, in the US and globally?
    • What new programs will the US and other governments introduce to provide income and help people, companies, and state and local municipalities to help bridge the financial gap? What further actions will the Federal Reserve take, to continue to provide the financial markets and companies with support?
    • How quickly will people return to restaurants, stores, large events? How fast or slow will that be? Months? Years?
    • When will people return to traveling and tourism, both in the US and globally?
    • As these unknowns gradually get answered or resolved, risk and market volatility will likely remain high. No one can provide answers to these questions. The markets will react suddenly to good news, as well as to disappointments. You need to be prepared for both. 
  • Even the smartest make mistakes and even repeat them.
    • Warren Buffett has just repeated one of his biggest mistakes. He wrote in the 2007 Berkshire Hathaway shareholders letter about buying US Airways preferred stock in 1989. It quickly stopped paying the high dividend he was expecting. He eventually sold the stock at a gain in 1998, but he said that owning airlines was like a “bottomless pit.”
      • He wrote in the 2007 letter: “Now let’s move to the gruesome. The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers.”
      • After swearing off airline stocks forever, he and his team started to load up on airline stocks in the fall of 2016, and by December 31, 2019, Berkshire Hathaway had invested more than $6 billion, owning close to 10% each of the top 4 US airlines. After the Covid crisis crushed the airlines stocks in March 2020, Buffett announced that they sold their airlines holdings during April 2020, at significant losses. He no longer thought the risk of owning the airlines was worthwhile. He never anticipated a pandemic type risk when he considered buying these stocks in 2016.

Risk of loss will show up again. What seems like unexpected risks, like 9/11 or the Covid pandemic, are always there, but we do not focus on them until they become known events. Other seemingly “unexpected” events will certainly happen again in the future. We just don’t know what the source of the major event, or risk, will be….and what its impact will be in the future. As none of us has a crystal ball or can predict the future, we as your advisors have a key role in helping you to manage your risk. And we take that responsibility very seriously.

We want to help you manage your risk, so that you and your family can reach your financial goals, whatever they may be, knowing that there are known and unknown risks that will impact you in the future.

If we are able to help you reach and maintain your financial goals and help you to effectively deal with all the risks that will show up along that journey, then we will consider our relationship a success.

We hope that you and your family are healthy, and enjoy this Memorial Day weekend with appreciation for your health, and the sacrifices of many who have come before us, so that we are able to live and enjoy the benefits of our country. Even during this pandemic, we have much to be thankful for.

As always, we are here for you, and family members or friends who could use our guidance and assistance during this crisis.

If you know of someone who may benefit from this blog regarding single or company stock risk, please forward this blog to them and let them know we are open to speaking with them.

 

 

Social Security Projections and Impacts for All

Blog post #444

Based on preliminary estimates, there may not be any increase in Social Security benefits to recipients next year, for 2021.**

Social Security benefit increases are based on annual changes in the consumer-price index (CPI) and are announced each year in October. CPI data from January – April would indicate no increase for 2021, per a policy analyst of The Senior Citizens League.**

The 2020 increase was 1.6%. Over the last decade, cost of living (COLA) increases in Social Security averaged 1.4%. These are much lower than the 3% average increases in the preceding decade, between 2000-2009.

While these increases have been minor, costs of food, housing, utilities and health care still seem to rise at a much greater pace. Since 2000, Social Security COLA benefits have increased by 53%, but prices of what a typical retiree spends grew by almost double, by 99.3%. In a report by The Senior Citizens League, this has resulted in lost buying power of Social Security benefits of 30% since 2000. 

This raises the importance of maintaining your purchasing power, or of having your other assets grow at a rate that is greater than inflation, which will be discussed further below. 

Social Security is still a vital benefit for most people, and we think it will continue to be for the long-term. For example, if a couple is receiving benefits of $20,000 per year, per person, that is $40,000 per year. Using what was considered a historically safe withdrawal rate of 4% from a diversified stock and fixed income portfolio (which is based on data with much higher interest rates than we have experienced for more than a decade), that $40,000 income flow would be the equivalent of having $1,000,000 of assets. If you are receiving more than $20,000 per year, or your future projection is to receive more than that, the equivalent asset base would be much greater than $1 million. That is not insignificant, especially as the benefits are risk-free and are not subject to any financial market volatility.

As interest rates have been very low since around 2008, the value of that income stream is actually now much greater. If you were to invest $1 million in an all fixed income portfolio over the past few years, you may only generate $10-20,000 per year, not the $40,000 as described above in Social Security benefits.

What are the implications of this information? 

Social Security benefits are not likely to increase much next year, or in near future. However, most costs are likely to keep going up. In the near term, gas will be less, and you may spend much less on travel, but we all hope that once a vaccine is discovered, some normalcy will return.

The key is that over the long-term, you must earn more than the rate of inflation on your overall investment portfolio, so that you can maintain or increase your purchasing power. The only place to do that for most people, to earn more than inflation on an after-tax basis, is in stocks or other riskier investments.

Although stocks have declined in 2020 and there has been heightened volatility in recent years, you must focus on the long-term benefits of having a diversified portfolio. We provide and plan for a solid “fixed income foundation” to provide stability for your near-term financial needs, for your next 5-10 years of spending, if you are in or near retirement.

Though it can be difficult, patience and discipline are required to maintain your stock allocation, but it has been rewarding to do so over the long-term. And your focus must be on the long-term, not on the next few months or years, but on the rest of your life, and that of your spouse and other family members.

A globally diversified portfolio goes through ups and downs, but over the long-term, a globally diversified, balanced portfolio can provide returns that are far in excess of inflation. For illustrative purposes, the Vanguard Star Fund has returned 6.76% per year over the past 15 years, and 9.16% per year since its inception in 1985.**** This fund generally has a 60% stock and 40% fixed income allocation, with diversified holdings in the US and significant International exposure. This is not a fund that we recommend, so this is not performance data of our firm. But I think this information is relevant for illustrative and informational purposes, to reinforce the long-term benefits of staying invested in stocks and being well diversified.

Social Security planning

If you are not yet receiving Social Security benefits, or are years from receiving Social Security benefits, you should verify your projections regularly at SSA.gov. Check your earnings and projected benefits every few years.

Even if your income goes down this year, due to the Covid crisis, you should know that benefits are based on a 35-year average, which is weighted toward your later years of earnings. Also, it is important that you, and a spouse/partner, earn credits for as many years as you can. For example, for 2020, you earn one credit for each $1,410 of earnings, up to 4 credits per year. You need to earn 40 credits, or 10 years of work, to be eligible for retirement benefits.***

Even if you or your spouse only work part-time for a significant number of years, there is still a long-term benefit of earning some amount of money, to earn these credits, and the resultant years of Social Security benefits later in life.

Focus on the long-term.

Adhere to your plan. Or talk to us about your planning.

Be positive.

As always, we are here for you, and family members or friends who could use our guidance and assistance during this crisis.

 

Sources:

** “Social Security recipients may be in for a rude awakening later this year,” Alessandra Malito, Marketwatch.com, published May 13, 2020.  Social Security statistics in the first 4 paragraphs are from this source.
*** Data per Social Security website, SSA.gov.
****Per Morningstar.com, May 14, 2020, for Vanguard Star, VGSTX. The returns cited do not include any advisory fees, such as our firm would charge a client.

Credit Card/Grocery Tips and Thoughts about Buffett

Blog post #443

Get more credit card benefits for grocery, restaurant and delivery purchases

As we are all buying or ordering more groceries, as well as using delivery services due to the pandemic, a number of premium credit cards have significantly increased their rewards for grocery purchases and food delivery services, either from grocery stores or restaurants.

Chase and American Express recently announced that for many of their premium credit cards, they will be offering up to 5X points or cash, on grocery store purchases. For some credit cards, this now includes grocery delivery services like Instacart.

Each credit card may have different benefits, and differing time frames (some through May 31, some until July 31), so you should check on each credit card’s specific benefits.

This may not be huge money, but if you can get 5% back, rather than 1%, that can make a difference to you and your family.

Other related items:

  • Some Chase credit cards are offering rewards for restaurant delivery services, like Door Dash. If you have these cards, take a look at their rewards or search for this on the Internet.
  • If you have normally charged all your purchases to accumulate airline or hotel points, you may want to consider using other credit cards that offer cash or points that are redeemable in other ways, especially if you already have lots of airline and hotel points, and don’t plan to travel in the near future (though we certainly hope that travel can resume sooner rather than later).
  • Instacart has become a popular grocery delivery service.  After using Instacart, I was very surprised with a recent purchase from a local grocery store (which is not a chain). While we thought this was a great service, there was a 12% mark-up on the food, plus a delivery fee, service fee, and we paid a tip as well.
    • In later reviewing the grocery store’s website, I learned that purchases through Instacart were marked up 12% (and ours was actually more), in addition to the other fees. Each grocery store’s relationship with Instacart is likely different.
    • While grocery delivery services are important these days, you should be aware of this cost, as it can be significant. We are more likely to pick up groceries that the store can pack, which will still be safe, and save a lot of money.

Thoughts on Warren Buffett’s virtual Shareholder meeting

This Saturday afternoon, Warren Buffett spent a few hours on a virtual live stream for Berkshire Hathaway’s annual meeting, providing a financial history of the US and the stock market, as well as discussing how Berkshire Hathaway and his team have handled the pandemic.

He announced that they sold all their airline stocks in late March and April, at significant losses. They had accumulated up to 10% stakes in the 4 largest US airlines in past years (Delta, Southwest Airlines, United Continental and American). He said, “the airline business has changed in a major way and the future of airlines is much less clear.” He said he made a mistake in buying them, as he believed the airline earnings would continue to increase, but that has changed now due to the pandemic.

The other major news was that Berkshire has not made any large stock purchases or deals in 2020.  This is quite different than in the financial crisis, when Berkshire made major investments or provided financing to many companies, including Goldman Sachs, Bank of American and others.

Buffett discussed the current situation as still having many unknowns, but the variance in possible outcomes is less than it was in March. He gave huge credit to Fed Chair Powell and the committee for their swift actions in March, 2020, and implied that the financial markets and the economy would be far worse now without their many programs and steps.

Our observations about Buffett/Berkshire’s actions and non-actions:

Buffet/Berkshire’s decision to sell all their airlines stock holdings, at or near a market bottom, could be viewed as startling or surprising, as he generally holds for the very long term. Buffett stressed in his comments that the sales should not be interpreted as his view on the overall stock market, only in relation to the airline sector.

Buffett is decisive, which is commendable. He acts quickly, when he buys, sells or makes transactional decisions. He is also confident enough in himself that he can admit a mistake and walk away from a loss.

This is just my assumption, but he must have thought that the other Berkshire companies would earn more with the proceeds from the airline stock sales than had he left the money in airline stocks. Or he thinks the airline stocks will decline much further or not recover for many years.

This is something to consider, as does he think that it will take many years for the airlines, and thus, hotels, travel and other leisure companies to get back to “normal,” or pre-pandemic earnings levels? This would be one of the many unknowns he referred to indirectly throughout the introduction and during his Q & A.

That Berkshire has not made any major stock purchases or provided financing to major corporations as they did in the Great Financial Crisis, or at other times in the past, is indicative of several factors, but should not be overly concerning to individuals as long-term investors.

  • Interest rates are very low and the Federal Reserve has taken strong action that has allowed large corporations to borrow huge sums in the credit markets recently (billions), which many were unable to do in 2008-09.
    • For example, Boeing is facing a severe cash crunch, due to their Max plane problems, and now the lack of demand for planes, due to Covid 19.
    • Last Thursday, Boeing borrowed $25 billion in one of the largest bond offerings ever. There were many different maturities, but the 10-year maturity paid 5.15%, or 4.50% more than the 10-year US Treasury bond. Boeing is rated just above junk status, as a very low-grade investment quality company, right now.
    • But instead of having to go to Buffett, and pay say 10-12%, which he may have been willing to entertain, other institutional investors (likely bond mutual funds, insurance companies, etc.) were more than eager to buy these Boeing bonds. As Buffett is not going to loan money to risky companies at 4-5-6% interest, he has not made these types of deals right now.
      • Just like we are not going to buy these Boeing bonds as investments for our individual clients. We would agree with Buffett that the risk is much greater than the reward. We are fine to pass on these.
  • Similarly, as the stock market dropped a lot very quickly and then has made a significant recovery, Buffett/Berkshire did not jump into the stock market to make any major purchases.
    • His view as a very patient, generally long-term investor has not changed. He wants to buy when he feels he is getting a bargain, or he perceives value. He views taking no action is an action.
    • Berkshire likely has more than $200 Billion already in many individual stocks. The top 5 holdings from 12/31/19 were Apple, Bank of America, Coke, American Express, and Wells Fargo. His holdings in these and other financial stocks have dropped significantly, due to less credit card usage, as well as increased default risk, if the pandemic crisis worsens or continues longer than expected, and there is not further governmental financial support. But he has not sold any of these major holdings, or anything else.
      • While Buffett clearly did not pound the table Saturday and say stocks are under-valued, he remains optimistic about the long-term prospects for stocks.
        • He provided clear caveats, and important reminders for stock investors, that stocks may not always perform well and there may be long periods without a recovery.
        • He said to be an investor in stocks, you must be prepared for significant declines, sometimes as much as 50%.
        • Buffett: “I don’t believe anybody knows what markets are going to do tomorrow, next week, next month or next year. Anything can happen. You need to be careful about how you bet simply because markets can do anything (in the short-term). Nobody knows what’s going to happen tomorrow.”
        • Buffett: “Equities (stocks) will outperform US Treasuries over the long term.”

Berkshire Hathaway and Warren Buffett are very different than you, our clients, and how we manage your portfolio. We feel it is important to listen and learn from Buffett and his team.

However, we are managing your portfolio so that you can meet your goals, and those of your family. Buffett is managing Berkshire Hathaway as a public company with a multi-generational mindset, and for stockholders, not to meet your personal spending and savings needs.

We share Buffett’s concerns and the many unknowns about the future. We have often stated that the future is unknown, because it is, but there are even more unknowns now than normal.

We are confident that we have structured your portfolio to be able to handle the unknowns of the future, by providing you with an appropriate amount of conservative fixed income “Foundation,” based on your personal circumstances. 

We remain confident long-term investors, for ourselves and for you.

As always, we are here for you, and family members or friends who could use our guidance and assistance during this crisis.

 

Riding a Financial Roller Coaster

Blog post #442

Let’s imagine your investment portfolio is like a roller coaster.

There are different types of roller coasters, in this imaginary world.

Ride 1: This is not your typical roller coaster. It is very flat, with a gradual decline that is barely noticeable. Not much excitement. Kind of boring. Slow. You get into your car and you don’t even need to be buckled in. No seat belt is required. You can see that there are no curves or major ups and downs to deal with. You can tell the ride ends slightly lower than the starting point, but it is barely noticeable. It is safe and secure and easy to handle. From the beginning of the ride, you can see where you will end, safe and sound, as the ride is all outside.

  • This ride would be the equivalent of a portfolio that consists of only very conservative fixed income, with short maturities. There would be no stocks in this portfolio. Just CDs, government bonds, and maybe a few investment grade corporate bonds. Over time, the rate of inflation will probably exceed your rate of return.
  • Ride 1 has hardly any risk, but hardly any reward, in terms of fun, or financial gain.
  • This ride is generally recommended for older riders, or those with specific circumstances in the near term.

Ride 2: This is very different than Ride 1, but typical of most of the coasters in this imaginary theme park. As you near this ride, it appears daunting. You can clearly see that passengers are required to use a seat belt and an overhead harness. 

  • You can see that this ride starts with some ups and downs, as well as some major curves.
  • This coaster quickly enters a huge building, which you can’t see into. 
  • There is a large sign in front of the ride:  Shortly after the start of this ride, the remainder of the ride will be in the dark. You won’t know where the ride will take you.
    • You won’t know what will happen next. You can’t see where the ride goes, once it enters the building (like Space Mountain).
  • There is a very deep moat around the building, and it appears that the building was built far underground.
    • You expect that the ride will go very far down, at some points.
  • You are also thinking….there must be some pretty big hills and huge declines in this ride, but you will not know about them in advance.
  • You don’t know where the end of the ride is or even how long it is.
    • You can see that the building is massive, very tall and wide, rising much higher than the first ride you saw. It must go in many different directions.
  • As you near the boarding area for Ride 2you see another SIGN. It reads:
    • This ride is safe, but you must be prepared for ups and downs and unexpected curves.
    • You will not know what will happen in advance, at any point during this ride, once your car quickly enters the building.
    • The ride requires a seat belt and 2 shoulder harnesses, for your safety. We require all these safety measures for diversification, in case one does not work.
    • The length of time of this ride varies, sometimes greatly. Every ride will be different. This is what makes this ride unique.
    • This ride can be fun, but at times very scary! You have been warned!!
    • You can choose to ride alone, in a single-seater, or we offer a two-seater, so you can be accompanied by one of our expert guides, who will help with your experience. 
      • We highly recommend that you choose to ride with an expert guide.
      • If you chose to ride with one of our expert guides, they will meet with you in advance, to help prepare you for this ride.
      • They will also pull off the track and talk to you a number of times during the ride, to check and see how you are doing, and maybe make some adjustments, based on your experience and feelings during the ride.
        • They will not be able to tell you exactly when things will occur on the ride, but they will give you guidance that will enable you to be better prepared to make it through the entire ride.
    • You can get off mid-ride, and end the ride early if you want, but that will deposit you directly onto ride number 1. We don’t usually recommend that.
      • If you want to go back onto Ride 2, where you re-enter is almost impossible to predict. Re-entry to Ride 2 can be emotionally difficult.

Nearly all our clients are on Ride 2 and all elected to ride with an expert guide.

A few clients, as well as those anticipating buying a house or with kids entering or going into college, are on Ride 1.

You have survived Ride 2. You can handle it. 

You survived the downturn late in 2018. You enjoyed the large gains of 2019 and were enjoying additional gains through mid-February 2020.

Then another unexpected drop on the financial ride occurred, and the markets collapsed with the Covid onset.

And since March 23, just as unpredictably, the markets have strongly bounced back. April has been a very positive month.

We told you that markets would increase and decrease in ways that are unexpected and sometimes may not even seem rational. The key is to stay on the ride and to keep being prepared, and positive, about the future.

We will guide you along the way and help to make adjustments when necessary.

We don’t know how the ride will continue, but we are pretty sure there will be more good experiences than bad ones. And we will be there for you, as well as your friends and family members, if they want guidance on their financial journey.

 

Thoughts on Where We are Now and Headed

Blog post #441

As we near the end of April 2020, we thought it would make sense to step back and consider the past few months, as well as approaches for the future.

  • As we have stated many times in the past, one of the basic concepts that we have told our clients is that we do not have a crystal ball and we cannot predict the future. No one can accurately predict the future, repeatedly and successfully.
  • This is why we work with you as a fundamental building block to develop a personalized asset allocation strategy developed for your personal circumstances and needs.
    • Throughout this crisis, and many others that have preceded it, having an Investment Policy Statement (IPS), or asset allocation plan, has enabled clients to remain invested and in the long term, be able to continue and reach their financial goals.
    • We can’t control or predict the financial markets. But we can control your plan and how you are invested, to meet your short-term withdrawal needs and your long-term financial goals and objectives.
      • Thus, we recommend continuing to adhere to the strategy of maintaining your personal Investment Policy Statement (IPS), or asset allocation, especially in this very unpredictable period.
  • Despite a decline in your account value, which you could view as temporary, a key question to ask is: has this decline directly impacted your ability to have the financial resources that you need today, or within the next year?
    • While none of us are happy that account values have declined, the answer for all of our clients should be that they have the financial resources that they need for the short to intermediate term, for the next number of years. This positive answer is due to proper planning.
  • The stock market is not the economy.
    • Remember, the stock market tends to look into the future and may not reflect what the economy is doing right now. The stock market can be driven by many factors, such as cash flow and profit/loss projections, predictions and emotions.
  • Fed Chair Powell has done a terrific job so far.
    • The Federal Reserve has been strong, responsive and acted swiftly when needed, especially in March and early April. This is one of the key reasons that the stock market has recovered significantly from its March lows.
    • The Fed’s actions have helped to solidify the fixed income markets and has enabled many public companies to sell bonds during this crisis, to help them to have the liquidity to get through the shutdown period. The Fed’s decisions to purchase bonds of companies that were credit worthy prior to this crisis, and then expanded to less than investment grade debt, has also helped to stabilize the credit markets.
  • Diversification works, for both stocks and fixed income
    • We are strong believers in diversification at all levels, as are the mutual funds that we use to invest in.
      • The past few months has not changed our minds about this. If anything, during a crisis, diversification again has proven to be very important. 
    • While our client accounts have been volatile, there has not been the huge destruction of your investments compared to if we held a portfolio that had been concentrated in certain sectors, say for example…..lodging and travel, aerospace, airlines, retail, entertainment and energy. We have not had overall 40%-50%-60% declines, though these sectors are held as part of a diversified portfolios.
    • We don’t place bets on individual stocks or focus on sectors. The asset class funds that we use strongly believe in diversification and have guidelines across industries and companies, as well as geographic regions, for International and Emerging Market funds.
    • While we still believe in our core investment beliefs, that does not mean that we don’t make changes. We have modified our portfolios over past months, prior to and during this crisis, to reduce some exposure to small value holdings in both the US and internationally. We did this for the long term, as we wanted to increase exposure to small cap asset classes that were not strictly small value.
      • In the short term, this has been a positive move. Again, this was made to increase diversification further and should benefit clients over the long term, as we cannot predict which asset class will outperform, or when.
    • In fixed income, we have always been well diversified, and we are taking steps to strengthen your holdings, and add even greater diversification.
      • Due to the economic impact of the Covid crisis and the plunge in oil prices, certain companies that previously were investment grade or not at risk of near-term bankruptcy, are now potentially more at risk.
      • We have been proactive in selling bonds of companies that were previously much stronger financially. We would rather sell these bonds now, prior to their maturities, and not put your investment principal at further risk with these types of companies.
      • We are reviewing clients’ fixed income holdings very carefully, as we always have, for exposures to sector and financial risk.
      • We are using large and well-established bond funds with excellent track records, processes and methodologies, more than we did in the past, so your fixed income holdings will be even more diversified.
      • We will be more carefully monitoring the impact of this crisis on municipal bonds, as state and local revenues have been impacted. We already know that some of the strict purchasing guidelines we have in place, and have had since we started our firm, are still valid today, and have helped us avoid municipal bonds which are related to single sector issuances, like airport or certain single source building projects.
      • We want the fixed income “Foundation” of your portfolio to be as financially sound as it can be, even during this period of greater financial uncertainty.
  • Expect the unexpected
    • This certainly has been the case over the past few months. However, even with all this uncertainly, and there could be more in the future, we want you to have a sense of financial comfort.
  • We will continue to act and make rational decisions, not emotional ones. We are not going to place bets on when a vaccine will be discovered or how fast the economy will recover…..as no one knows those answers. We do know that sticking to a philosophy works, over the long-term. We will continue to do the following:
    • Regularly review and rebalance your accounts.
    • Place tax loss trades as appropriate, which will save you tax dollars.
    • Adhere to your financial asset allocation plan and modify that if your circumstances have changed.
    • Having a strong fixed income foundation and ample cash and liquid assets for those regularly withdrawing money.
  • We have again been reminded why we avoid certain types of investments.
    • We don’t invest in investment funds or products that are considered illiquid or restrict your right to redeem your money to a certain percentage a quarter or annually.
      • Many of these types of investments are not permitting withdrawals or severely restricting investors’ access to their money. We don’t want your money to be restricted, so we don’t use these types of products.
    • We don’t invest in high yield or junk bonds, as they have the greatest risk of default, and many of them declined significantly in value during past months. The higher interest rate that they offer are not worth it, if you don’t get your principal back.
    • We don’t invest in stocks primarily due to high dividend yield, as those companies tend to be the riskiest, like junk bonds. This does not apply to all companies, but those paying a very high dividend yield is often a sign of some type of underlying risk in the company. And usually the risk is not worth it, especially if the dividend is later cut or eliminated, or the price of the stock eventually declines significantly. This is what has occurred to many energy stocks. While the funds we utilize hold energy stocks, the exposure is quite small.
      • Bottom line….don’t reach for yield…..if the interest or dividend yield is far above the market average, there is usually a good reason…it is much more risky.

 

As always, we are here for you, and family members or friends who could use our guidance and assistance during this crisis.

Hope

Blog post #440

It seems like ages ago, but our third blog post of 2020 was called “Hope is Not a Plan.” I wrote that around January 15th.

In that post, I wrote that “Hope means that you want and desire something to happen in the future. But hope, on it’s own, implies that you cannot influence the outcome.”  My point was that planning was critical, and maybe more important than hope.

I realize now that I may have been at least partially wrong, as we all need hope. Now more than ever.

Wednesday, I read an email newsletter from Ari Weinzweig, one of my favorite business leaders, entrepreneur and author, who is co-founder of Zingerman’s Deli and Community of Businesses, based in Ann Arbor, MI.

In his Zingerman’s Guide to Good Leading Book 4, The Power of Beliefs in Business, as well as the newsletter, Weinzweig wrote about the 6 elements of hope in what he refers to as the “Hope Star.” These elements are:

  1. Help people see a better future.
  2. Help people see how they might get to that future.
  3. Show people how much they matter.
  4. Help people see how much their work matters.
  5. Help people see how small steps are the keys to success.
  6. Show people how they fit into a larger whole.

These concepts are on leadership and business but are applicable to all facets of life.

It is clear that we all need hope. Hope can be valuable. As Ari wrote in his newsletter, “when we all do these six things, hope levels go up. And that when hope levels improve so too does the quality of work, leadership effectiveness, learning and even personal health.”**

In our work with our clients, we strive to help each of you “see a better future,” even during times of economic downturns or difficulties in your personal lives. We are there for you, in good times and bad.

We have often described our investment attitude as being “rational optimists” and that is key, as it involves being hopeful, as well as being rational, and not emotional, in making decisions.

We want to play a key role in understanding your hopes and planning with you, so we can help you get to that future you hope for.

We realize that our work is important, and we take it very seriously. One of the reasons that we write this blog every week is so that you hear from us regularly, regardless of what is going on in the world.

As Ari points out in #5, small steps are the keys to success.

  • Each smart decision that you make.
  • The conversations, meetings and emails that we have.
  • Talking about your plans and intentions, as that increases the likelihood of them occurring.
  • The planning we do. The decisions we make.
  • Each time you save, invest and focus on the long term.
  • Adherence to our investment philosophy.
  • Your decision not to panic, when others might be.
  • Your decision to be positive and have hope.

These are all small steps that lead you to a hopeful and better future.

Weinzweig wrote about leaders. You can insert financial advisor and get the same result. “As leaders, our job is to make sure that people realize that all the little things they do every day add up to big results….It helps keep us going when the going gets tough….It may be hard to see in the moment, but in the long run, it adds up to big things.”***

Weinzweig also wrote this, which truly applies today. “I hope that tomorrow can be better than today; that our work will make a difference; that if we work hard and go after greatness, good things will happen. I hope that we can contribute positively to our emotional, intellectual, and financial improvement, and that of others around us.”****

We hope that our firm can provide the same things!

Special offer…courtesy of Ari Weinzweig, any of our clients or readers may use the code COMMUNITY2020 for 25% off of any of the books, pamphlets or digital learning at ZingTrain.com.  The 6 points of hope, discussed above, is Secret pamphlet #45. I highly recommend all their business books.

Sources:
**Zingerman’s Community of Business Ari’s Top 5 email newsletter, dated April 15, 2020.
*** Weinzweig, Ari. Zingerman’s Guide to Good Leading, Part 4, The Power of Beliefs in Business, 2016, page 330-31.
**** Weinzweig, Ari. Zingerman’s Guide to Good Leading, Part 4, The Power of Beliefs in Business, 2016, page 285.

The Current Reality and How to Deal with It

Blog post #439

The US and International stock markets have rallied strongly over the past few weeks, since the low around March 23rd.

We are facing one of the greatest challenges of our lifetimes, in both medical and economic terms. And while the growth rate of Covid-19 spread is clearly dropping due to physical distancing, we don’t think that the medical issues are anywhere near being resolved enough to enable the economy to fully recover anytime soon.

From the 2020 high, the S&P 500 (an index of 500 US-based large companies) dropped 35% to its low point around March 23. A major decline like that is logical, given the almost total economic shutdown in the US and in many other parts around the world. Indices of other stock market asset classes have declined as well, some by much more, both domestically and Internationally.

It does make sense that other sectors have gotten crushed even more than the overall 35% decline, such as airlines, hotels, retail and energy sectors.

But since March 23, the S&P 500 and other asset classes have recovered sharply. As I write this mid-day on Thursday April 9th, the S&P 500 has gained 28% from its bottom and is now a 20% move back to its earlier 2020 all-time high point.

The current reality is that the stock market, as it always does, is quickly reacting to news and future expectations. The stock market reacts quickly and unexpectedly, but not always logically. 

The above sketch by Carl Richards makes so much sense and is very logical. We are in the midst of a current reality that is unknown and unpredictable (the future is always unpredictable, but even more so now).

Stock markets are responding up and down, sometime widely, based on medical news, forecasts, predictions and hopes for an economic resumption. They are also responding to major Federal Reserve actions and other recovery program announcements and legislation.

So how do we manage your accounts, to help you reach your short and long-term goals, given this volatility and all the unknowns? We stick to the long-term plans that we have developed for you. We follow our long-term philosophy and discipline that we know has worked well for many years. It is really the only rational approach.

We certainly do not follow the chart below. We do the exact opposite.

When things were really scary and the market was declining in early to mid-March, we were tax loss selling. That means we were not getting you out of the market, but we sold investments to recognize taxable losses and replaced them at the same time with similar, but different investments.

In the past few weeks, we have gradually been re-balancing accounts, which is what the above sketch DOES NOT describe. We were buying low, not selling. When others were scared and selling, we were taking a very long-term view and have been buying more stocks. In late 2019 or early 2020, when others thought things were safe (and buying), we were gradually selling some stocks, if your portfolio allocation to stocks was too high, in excess of your personal investment plan stock target.

This logical and disciplined approach is really the only way to successfully navigate the stock market over the long term, in a calm and reasonable manner. We may not time the bottom, but we are not trying to.

We don’t know if there will be another bottom….weeks or months from now, if the medical news changes or an economic recovery takes longer than many other investors appear to be anticipating. This is why we are buying, but gradually.

For most of our clients, we are comfortable with a gradual re-balancing approach right now. For our younger clients who have a very long-term time frame, we are re-balancing more aggressively. We are handling your accounts on a very individual basis, as you each have different time perspectives, circumstances and goals.

We hope our investment approach and disciplined philosophy makes sense to you, and provides you with a form of comfort, during this time of great uncertainty.

We hope you and your families are healthy and safe, and can connect virtually or by phone, during this holiday weekend.

 

CARES Act and Tax Update

Blog post #438

The IRS, Federal Reserve, Congress and the President have enacted various measures in response to Covid-19. The goal in this post is to provide you with a summary of key information that could be most relevant to you.

Income Tax Return and Payment due dates delayed

The normal Federal tax deadline of April 15, 2020 for filing tax returns and making payments has been moved to July 15, 2020. Most states have made the same change.

  • You do not need to file any extension.
  • You don’t need to make payments that would have been due on 4/15/20…until July 15, 2020, if you owe money or would have needed an estimated payment for 1 Qtr. 2020.
  • The due date for funding a 2019 IRA or Roth IRA is now July 15, 2020.
    • Key point: If you intend to do this, you should make your deposit now…while the market is low (maybe it will be higher in July, we don’t know).
  • However, the 2nd quarter estimate due date of June 15, 2020 still applies….. so yes, that is now due before the 1st quarter due date of 7/15/2020. Leave it to the IRS!
  • If you usually have withholdings from IRA Required Minimum Distributions, you may not need to take the RMD in 2020, so you may need to pay estimated taxes in 2020. Discuss this with your CPA or tax preparer.
  • For more information on these changes, see the following link for a more detailed Q&A.

CARES ACT

The CARES Act was signed into law about a week ago and will impact almost everyone in the US. We are trying to provide a summary of the most relevant information of wide-ranging legislation, that impacts businesses, individuals, and others.

Within a day after the bill passed the Senate, one of the thought leaders of our national firm, Jeffrey Levine, produced a 25-page detailed summary (if a 25-page article can be both detailed and a summary!). We are providing a link here to the website, where you can find a PDF of Jeff Levine’s article. Jeff is the Director of Advanced Planning for Buckingham Strategic Partners, our national back office firm. Jeff is one of the country’s top financial planning’s experts. The link is at Kitces.com, where Jeff and his partner, Michael Kitces, write lengthy articles on financial planning. Michael is one of the top national speakers on financial, tax and estate planning, and both are great additions and resources to our firm, as they are now part of our national alliance partner firm.

As each topic is addressed below, if you want more detailed information, please see the instructions at the bottom of the post on how to access the PDF article* to view the appropriate page within the PDF.

Recovery Rebates for Individuals:

  • Married joint filers to receive $2,400, other filers receive $1,200, increased by up to $500 per child under age 17.
  • However, high income taxpayers will not receive any money at all.
    • Phaseouts are based on your AGI (adjusted gross income) for 2018, or 2019, if you have filed a 2019 income tax return, beginning at the following levels:
        • Married Joint: $150,000
        • Head of Household: $112,500
        • All other filers: $ 75,000
    • The exact amount of the phaseout depends on how many children you have under the age of 17.
    • See chart on top of page 8 of the PDF, for more details on the refundable tax credits.
  • The initial “recovery rebate amount” will be based on whatever income tax return you have filed, either 2018 or 2019, subject to when the IRS processes your return, and when they process/review whether you are eligible.
    • The rebate amount will later be adjusted based on your actual 2020 federal income tax return.
    • Unfortunately, if you earned $200K in 2018 and 2019, but expect to earn only $75,000 in 2020 due to this outbreak, you will not get a recovery check until mid-2021. However, if you make more in 2020 than in prior years, you won’t have to pay back the excess.
    • Key point: If you earned significantly less in 2019 than in 2018 or would fall below the above threshold levels for 2019, but not in 2018, it would make sense to file your 2019 Federal income tax return as soon as possible. 
    • Key point: If you had a baby or adopted a child in 2019, you should file your 2019 Federal income tax return as soon as possible, if you think you will qualify for a recovery payment.
    • See pages 6-10 of the PDF for more information on the refundable tax credits.
  • No one knows the exact date of when these payments will be issued. They may not be issued until May.
    • If the IRS has a bank account on file that was used for a 2018 or 2019 direct deposit refund or withdrawal, they will use that bank account.
    • If the IRS does not have a bank account on file, and you are eligible, it will be mailed to your last address of record.

Required Minimum Distributions are Waived in 2020:

  • Key point: If you are subject to taking a Required Minimum Distribution (RMD) from a retirement plan, such as an IRA or 401(k), which is generally those over age 70 ½, you don’t need to take an RMD for 2020.
    • We will discuss this with each of our clients as 2020 progresses. 
    • Key point: If you don’t need the RMD money for living expenses, this can substantially reduce your 2020 income taxes and allow you to keep the RMD amount in your IRA.
    • If you have already taken your RMD in the past 60 days, there are ways to return the funds, if you don’t need them. Contact us to discuss this!
    • Key point: If you will not be taking an RMD for 2020, but in past years you have used the RMD for your federal or state withholdings, you should contact us or your tax preparer, to discuss paying tax estimates, the first of which will be due on 6/15/2020.
    • This also applies to those who are beneficiaries of stretch distributions, for IRAs you received upon an inheritance.
    • For more information, see pages 11-15 of the PDF.

Business provisions:

  • Key point: If you have a small business and have been impacted by Covid-19, you should carefully review these provisions as soon as possible. Time is important.
    • Business owners should likely contact their CPA for guidance, as these programs interact, and you cannot do all of them. 
  • There are several different programs.
    • Today, April 3, the Paycheck Protection Program and forgivable loan program is scheduled to begin accepting applications via SBA approved banks. As of now, this is to be handled on a first-come, first serve basis. The final loan application has not been released as of Thursday am. These loans are forgivable if a business keeps their workforce largely intact and use the loans for eligible expenses such as payroll, rent and utilities. There is no guidance as to how fast these loans will be processed and funded.
    • If you have a business of less than 500 employees, you should review the provisions on pages 20-24 of the PDF, and evaluate which of the following makes the most sense for your situation, with your advisors:
      • Paycheck Protection Program,
        • If your business get this loan, it is not eligible for the next two items.
      • Employee Retention Credit for Employers,
      • Deferral of payment of payroll taxes, and
      • Net Operating Loss rules changed
  • Due date for funding pension plan contributions for calendar year 2019 plan year is extended to January 1, 2021.

Unemployment Compensation Benefits Expanded:

  • Key point: Self-employed individuals and others who are generally not eligible for unemployment, will now be eligible for up to 39 weeks of benefits.
    • This is a major change and can benefit many individuals who have been impacted, who run their own businesses. Think of independent contractors, consultants, hairdressers, massage therapists, people who own small retail stores, etc. 
  • Unemployment benefits can be increased by states by up to an additional $600 per week, for up to four months, to be funded by the federal government. This will be in addition to whatever state benefit you would be eligible for.
  • If you are now unemployed or have no revenue due to the state mandated shutdowns, you should check online with your state unemployment website. They may not yet be updated to provide for the self-employed provisions (MI was not as of a few days ago), but you should try to apply as soon as possible.
  • Unemployment compensation has been extended to 13 weeks.
  • See pages 19-20 of the PDF.

Coronavirus-Related Distributions:

  • You can take up to $100,000 in distributions from an IRA, employer-sponsored plan (like a 401(k) or 403(b) or a combination of both, during 2020, if you have been significantly impacted by Covid-19 (definition is broad, but there are guidelines).
    • These are exempt from the 10% penalty, for those under age 59 ½.
    • The distributions are not subject to normal 20% federal withholding rules.
    • They can be repaid within 3 years, if you want to. If you pay tax on a distribution and then repay the distribution within 3 years, you can go back and claim a tax refund.
    • They are subject to taxable income, either all in 2020 (if you estimate that this would be the lowest income year) or spread evenly over tax years 2020, 2021 and 2022.
    • See pages 11-12 of the PDF for more details

Loans from Employer Sponsored Retirement Plans:

  • You can borrow $100,000, increased from the normal $50,000. Payments can be delayed for up to one year. See page 13 of the PDF for more details.

Charitable Contributions:

  • If you no longer can itemize, you can now deduct $300 of cash charitable contributions beginning in 2020.
  • If you can afford to make major charitable contributions, and are so inclined to do so, you can deduct up to 100% of your AGI for “qualified charitable contributions” in 2020.
    • If you contribute more than your AGI, the excess can be carried forward 5 years.
    • Contributions to donor advised funds and family charitable foundations are prohibited.
    • Key point….we all know there is great need at this time….if you are so charitably inclined, please contact us or your tax advisor to discuss this impact.

Student Loan Borrowers:

  • Provisions include payment deferral until September 30, 2020, for which no interest will accrue, but it appears you must contact your loan provider, as well as employers can pay up to $5,250 of student loan obligations and that will be excluded from compensation. Please review pages 16-18 of the PDF.

Medical and Healthcare Provisions:

  • The items for “qualified medical expenses” for HSAs, MSAs and FSAs have been expanded, to include over the counter medications and female care products.
  • Other items, such as Covid-19 related expenses and telehealth services are considered covered. See pages 18-19 of the PDF.

For a chart and overall summary, see top of page 4 of the PDF, which covers rebates, IRA distributions, other provisions, unemployment compensation, and small business benefits.

There are likely to be changes to some of these items and this article does not cover all provisions of the CARES Act. Please consult with us or your tax professional before making any decisions.

Please forward this to others who may find it helpful, especially small business owners and those who can benefit from the new self-employed unemployment compensation, as those people may not be aware of these new provisions.

Source:

*Click on article link above.  Once you reach the article, click the printer and then choose PDF.  After choosing PDF, a box will pop up and you will click download your PDF.  Then you will want to save the PDF to your desktop.  After saving to your desktop, you will see a PDF saved as kitces.com… The CAREs….  Click on this to view the PDF.

Tax Relief Q&A

The IRS recently released answers to some commonly asked questions about the tax relief provisions designed to help taxpayers and investors dealing with economic fallout from the COVID-19 pandemic.

The primary benefit of this relief is an extension of time to file and pay your taxes. Specifically, what
would have been due on April 15, 2020, is now due on July 15, 2020.

Here are updated answers to the questions we’ve been tracking:

Question: Do I qualify for this relief?
Answer: Any individual, trust or business (incorporated or otherwise) is eligible for relief. If the return or payment is due on April 15, 2020, the new due date is July 15, 2020. If the return or
payment is due on a date other than April 15, 2020, this relief doesn’t apply.

Question: Is the $1 million maximum the same for everyone?
Answer: No, income taxes owed by individuals, trusts, corporations and other non-corporate
businesses that are due on April 15, 2020, regardless of the amount, are now due on
July 15, 2020.

Question: I will not be able to file my 2019 income tax return by April 15, 2020. What do I need to do?
Answer: Simply put, nothing! Your new due date for payment and filing is July 15, 2020.

Question: What about my first quarter estimated federal tax payment, normally due on April 15, 2020? When do I pay that?
Answer: Because it is a payment due on April 15, 2020, it is now due on July 15, 2020.

Question: What if I am still unable to file my 2019 income tax return by July 15, 2020?
Answer: You can request an automatic extension of time to file your tax return, which would
extend the final due date to October 15, 2020. To avoid any interest and penalties, you
will need to pay any remaining tax that you estimate is due with the extension request
filed by July 15, 2020.

Question: Does this mean that I can wait until July 15, 2020, to make my 2019 traditional IRA, Roth IRA and/or HSA contribution?
Answer: Yes. The deadline for making contributions to IRAs and HSAs is also extended to July 15, 2020.

Question: I own a business and have payroll taxes due in April. Does my business get relief?
Answer: No, normal filing and deposit due dates for payroll taxes continue to apply.

Question: My business owes the employer contribution for our company retirement plan. When is this due?
Answer: If payments would have been due on April 15, 2020, they are now due on July 15, 2020.

Question: If I’m not mistaken, my second quarter 2020 estimated tax payment is due on June 15, 2020.  Are you saying that, if I take advantage of this relief, I’m going to have to pay my second quarter 2020 estimated tax payment before I pay my first quarter 2020 estimated tax payment?
Answer: That’s correct.

Question: What if I’ve already filed my taxes and have a payment scheduled to be automatically deducted from my account on or before April 15, 2020? Will this payment automatically be rescheduled to July 15, 2020?
Answer: No, the payment will not be automatically rescheduled to July 15, 2020. If you do nothing,
the payment will be made on the date you chose. If you scheduled your payment as part of
filing your tax return by authorizing an electronic funds withdrawal from your account, call
IRS e-file Payment Services 24/7 at 1-888-353-4537 to cancel and reschedule your payment.

Question: I’m expecting a refund. Is there any reason for me to wait to file my tax return?
Answer: If you expect a refund, it is generally better to file your tax return as soon as
possible. Nothing associated with this relief changes that equation.

 

It’s important to note that this relief only applies to 2019 federal income tax liabilities. If you owe
state taxes as well, be sure to check with your tax preparer to see if any additional relief is available
at the state level.

This information could change quickly and without much or any notice if additional guidance
becomes available, so we will continue to monitor it and keep you informed.

 

© 2020 Buckingham Strategic Partners. All rights reserved.