Episode 67

Your questions answered

June 15, 2024

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Welcome to The Retirement Tax Podcast, where hosts Steven Jarvis, CPA, and Benjamin Brandt, CFP, work together to bridge the gap between tax professionals, financial advisors, and their mutual clients to help reduce most people’s largest expense in retirement: taxes. Each week, they will dive into conversations around taxes, focusing on what you can truly control (instead of what you cannot) and how to set yourself up financially for your future.

In this episode Steven and Ben are back together and answering questions sent in by great listeners like you. Covering a variety of topics Ben and Steven take the time to give specific answers to these situations along with broader insight that will benefit everyone listening in. Stay tuned to the end as Steven and Ben talk about tax filing statuses, 529 plans and creative ways to use them along with 1031 exchanges and rental properties. You can submit your own question at retirementtaxpodcast.com


What You’ll Learn In Today’s Episode:

  • What your “options” are for picking a filing status
  • How the IRS looks at scholarships for 529 beneficiaries
  • Tips for rental properties and capital gains.
Ideas Worth Sharing:

“I think if you’re trying to be everything to everyone, you’re not going to be anything to anyone.” – Benjamin Brandt

“ We want to do this proactively as we go along so that as you’re incurring the expenses, you’re taking the distributions.” – Steven Jarvis

“Do you want somebody that’s done this once and they’re jumping on Google the same way you are to kind of figure this out? Or do you want somebody that’s done it dozens or hundreds of times?” – Benjamin Brandt

Resources In Today’s Episode:
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Read The Transcript Below:

Steven (00:07):

Hello everyone and welcome to the next episode of the Retirement Tax Podcast, AKA the least Boring tax podcast. I’m your host, Steven Jarvis, and I am one of your resident tax nerds. I’ve got with me Ben Brendt. Ben, welcome. Always excited to record with you.

Ben (00:22):

Always a pleasure. I wish our listeners could listen to the half an hour of non-tax things that we talk about before we press record.

Steven (00:29):

Yeah, yeah, we always have a good time. We’ve got kids of the same age, so family is often a topic. Upcoming adventures is often a topic. Someday maybe we’ll just give that behind the scenes recording and drop that as an episode. We’ll see.

Ben (00:42):

Yeah, retirement and tax experts, definitely not parenting experts is what we’re discovering.

Steven (00:46):

No, we’d probably also have to get our wives to sign off on those episodes since we get pretty far reaching in what we talk about.

Ben (00:53):

That’s true.

Steven (00:54):

But today we want to go through, we’d love how often our listeners reach out and send us questions. So you can go to retirement tax podcast.com and there’s a form you can submit there and send us questions. And so for today’s episode, we’ve got some questions that have been sent in and we want to just go ahead and run through some of those. Although Ben, I want to start off with the fun one, which I think this is related to your other podcast, but someone asked what the origin story of the podcast theme song is, which for this podcast, I don’t remember the website. I mean we picked some generic, like there’s music at the beginning. It’s nothing exciting. So I’m assuming it’s the backstory on your other podcast, which I always forget the details of. So why don’t you quickly share that for people who listen to both podcasts?

Ben (01:35):

Yeah, so that song is called Silver Things by the Band LimbBeck, L-I-M-B-E-C-K, sort of an independent band, not very well known, but it’s a band that I kind of followed in college and that’s a fun part about what my wife and I like to do. We go to and see live music and I went to see them. I was in San Diego for a work event in 2016 and I saw them at some tiny bar. If you live in San Diego, it’s the Soda Bar. And I met him after the show and I said, Hey, I love this specific song. Can I use it on the podcast? Expecting he’d want some sort of monetary exchange and being the cool artist that he is, he is like just the fact that you want to use it is payment enough and you can use it. And so I use it for coming on close to 10 years now.


And then I thought as the podcast grew, and if I think about if there was ever a lawyer that came back and said, you’ve got a couple million downloads, could we have $2 per episode that you’ve used that song? I thought I needed to get something in writing. And so I tasked a member on our team to find out who actually owns the song. It turns out this guy doesn’t own his own songs, it’s record level called Doghouse Records, which has since sort of defunct. And so we went on this year and a half odyssey of like, can we please give you some money to make this legal? And so I guess long story long we’re legal now and we paid some money. I think they wanted the princely sum of $200 to use it forever. So once we finally got them some money, now we’re going to use the song forever because we officially, we don’t own it of course, but we own the ability to use it. So Silver Things by Limbeck is the song. So if you ever talk to a podcasting expert, they’ll say, do not do what I did. Don’t use any music that could be owned by record label. It could come back to haunt you. And I did not listen to that advice, but now I’m legal so I can talk about it.

Steven (03:17):

Well, that’s a super fun backstory and if there are listeners who don’t know what we’re talking about, Retirement Starts Today is the other podcast that Ben does talking about a wide ranging variety of topics around retirement. So go check it out to at least hear the song. And this is a perfect kind of segue into some of the things we wanted to talk about today, which sometimes there can be this gap between maybe what we should do or how we think things work and how things really work on paper and how things really work when it comes to how the laws are written. Because one of the first questions that we wanted to talk about today, the listener writes in and says that he and his girlfriend are in their fifties getting ready to retire in the next couple of years. They’re not legally married but essentially almost in a common law marriage, which again, there’s important distinctions here between how we think a song works for rights and things like that and how it actually works on paper because as far as the IRS is concerned, our filing status is based on our legal marital status at December 31st.


And so we get a lot of questions about is it better to file single or married filing jointly, but that’s not really just a choice we get to make. It comes down to our legal marital status, and so we can choose between married filing jointly and married filing single, which Ben you and I were talking before we jumped on the recording, that there’s very few situations where that makes sense. Student loans is the most common. The other place that I see this is when people are going through really messy relationship issues outside of taxes. So married filing single is typically not something that we’re going to see very often. But there was kind of a second piece to this question which was asking about how filing status affects social security benefits. So Ben, do you want to talk a little bit about how social security benefits work?

Ben (05:02):

So when we think about social security benefits, we have our own benefits that we’ve either paid in 24 or we have access to our spouse’s benefits, a percentage of those, and that’s based on age and marital status, and we even preserve some of that if we’ve been married and then divorced, married for a certain amount of time and then divorced and things like that. And there’s things like family caps and things like that. So you’ve got your benefit, your primary insurance amount, and then it could be a lot of things that are derived from that. It’s not so much as I see it and I’m not an expert in all of this area, but it’s not so much your filing status with your taxes, it’s what is your filing status legally, because if you go onto the social security website and you play with some of their calculators, you can elect your benefits or spousal benefits.


So things like common law marriages or things like that that vary state to state. I’m not familiar with how they would change, but social security is a federal program, so I think you have to be legally married, you need to have a marriage certificate, divorce certificate, whatever that might be. It sounds like those are very similar topics, married filing separate or married filing jointly and your social security benefits, but I don’t think those have any relation. One thing where we could get potentially combine the two ideas is the taxability of social security, which is if you’re married filing jointly, it starts at phase out like 44,000 a year or something like that and married filing separate. I haven’t encountered that, but I’m guessing that’s going to be significantly lower. Probably falls into one of those rules of thumb in that there’s going to be a penalty to do that. There’s got to be a very specific reason you mentioned student loans is one that I had heard of. Student loans is certainly not in my expertise. We do have a client that is very involved in farming and they do married filing separately and I let their accountant make that decision. I know nothing about farming and even less about accounting, so I let the experts do that. But yeah, that’s my background on social security and being married.

Steven (06:53):

This is definitely one of those areas where I try to keep a watch out for times when it’s probably time to involve a professional who specializes in this area. And so if you really want to go down this rabbit hole, because it sounds like almost like they might be considering getting legally married just for the tax or social security benefits and before you put pen to paper and ink, that deal definitely would want to take some time to have somebody evaluate your specific situation. Again, what we’re talking about is really from a high level, but love that people are thinking about this stuff.

Ben (07:20):

Yeah, there’s significant value in experts if you’re going to entrust someone’s thoughts or ideas or opinions with what could be hundreds of thousands of dollars in money or value. Do you want somebody that’s done this once and they’re jumping on Google the same way you are to kind of figure this out? Or do you want somebody that’s done it dozens or hundreds of times? Same thing if you’re entrusting your life savings to a retirement expert. Do you want a generalist that invests for 25 year olds and 55 year olds and 105 year olds, or do you want somebody that only does this exclusively? So if I’m looking for some kind of a unique situation or potentially like a loophole or something like that, I want to find an expert that has done this dozens and dozens of times before I put pen to paper.

Steven (08:02):

Yeah, absolutely. The only correction I would make in there, Ben, is that most likely they’re not getting on Google, they’re just going to chat GPT.

Ben (08:09):

Right? Yeah. Chat. GPT knows it all.

Steven (08:11):

Yeah, that’s right. Okay, so then the next question that got sent in was related to 529 accounts, and it was really interesting situation that Brian sent this in. So Brian, thanks for reaching out that we have a 529 account for a child who is already, it sounds like already done with college or wrapping up college here soon and over the years had scholarships that could have been used to make tax-free withdrawals from the 529 account but weren’t in those years. And so Brian’s asking if he can now go back and retroactively take those distributions and use the scholarships as the reason that those should come out tax free, then you’ve got a little bit of a quizzical look on your face and I think that’s the appropriate response because as I read this, I had kind of an idea of where this was going, but it’s like, Hey, you know what, Brian, this is a great question, but not one that’s got an obvious answer to it.

Ben (08:59):

Yeah, I’ve never been encountered with that before. Yeah. Like I said, my knowledge is more in the retirement space, which now with the new rules 529 can be involved in the retirement space. I don’t think that’s what this listener specifically asking about, but I don’t know if they have a good answer for this. 

Steven (09:14):

So it’s interesting because this is another area where the tax code doesn’t have a lot of logic to it because on this podcast we talk about HSAs (health savings accounts) and one of the huge advantages of HSAs is that we can do exactly what Brian is talking about from the theory standpoint of if the HS A was in forced 10 years ago and we had medical expenses 10 years ago that we didn’t take as a distribution at that time, I can go back 10 years later and say, you know what? My cash flow in a place, my HSA balance is in a place where I want to go back and get a reimbursement from that thing 10 years ago. And that’s not only allowed, but I mean it, it’s clear in the rules. You can absolutely do that. In contrast, even though this feels like a similar situation, the rules are very, very murky in this area and this is one of those fun areas of the tax code where there isn’t a bright line that the IRS has written either with case law or in the rules itself to say how this should be handled.


The way the rules are written, it’s certainly the best case scenario is that you are doing this in the year of the scholarship or in the year of the education expenses. That’s going to be best case scenario. We want to do this proactively as we go along that as you’re incurring the expenses, you’re taking the distributions, but the way the rule has written has left some room for interpretation and you can find people who will pretty adamantly tell you on either side of this debate of, Hey, the IRS is moot on this, so you can go back as far as you want and you’re not going to have a problem. And you’ll also find people who say, Hey, no, it’s clear that the IRS is implying that you should only do it in the year the expenses were incurred. So I don’t have a definitive answer that I can give on this podcast and say everyone should do it this specific way.


Brian, what I would say in your situation is there’s a lot of money involved. This is an area where it’s certainly worth asking the question and looking into, to Ben’s point before, you’re going to want to find a person who does this over and over and over again who can walk through your specific situation and help you make an informed decision. Because when the IRS is unclear on something, we are kind of left with making the best, I don’t want to say guess, but pretty close to that, making the best decision we can based on the information we have and then being okay with the risk. Because the risk here would be that the IRS does clarify this sometime in the future and says, no, what we meant is only in the year the scholarships were incurred and now you’re going to have to go back and pay taxes. The good news is no one’s going to go to jail over this. No one’s going to accuse you of committing tax fraud over this, but you do have to go into it knowing that this is a subjective gray area and you’re taking a little bit of a risk of how the IRS is going to interpret it.

Ben (11:43):

That’s solid advice. Is this the same, Brian, on both questions? It probably is.

Steven (11:46):

It is. Brian sent in the question and decided to elaborate for us, which I appreciate. I love as much context as I can get. So then we will change topics again here, Ben, and talk about question that came from Rob, basically about what should he consider doing with rental properties. He goes into retirement. Ben, as you have clients that come to you and are looking to make that transition into retirement, how do you have conversations about real estate?

Ben (12:08):

Yeah, real estate is its specific thing. We don’t really have too many clients that are business owners or real estate investors just because that is such a specific piece of the market. When you think about accelerated depreciation and all sorts of high level tax advice, there’s better experts I think in the world than I am. Our average client is an everyday millionaire that they’ve worked maybe one place for a really long time, not much interaction with financial advisors and they’re looking at how to spend more money and pay less taxes and get some coaching on even better retirement. So while we do have one or two clients that do have rental properties, I would say I’m far from an expert in this specific area. Now we do have a wonderful accountant that’s on our team by the name of Steven Jarvis, so if he feels like he can answer their questions, maybe that would be a better fit, but we tend to not get too many clients that have significant exposure in this area just because other experts I think that are more boots on the ground. 

Steven (13:04):

Ben, I’ll admit that part of the reason I asked you the question is I had a suspicion that that’s what the answer would be. I think it’s really important that whatever professionals are working with in whatever area of their lives, you want to make sure you’re working with someone who knows what their limits are. And so if you come to someone like Ben who wants to be your financial advisor, and he says, you know what? I know everything about every topic. I got you. And no matter what the topic is, he, it just seems like he has the answer right off the top of his head and never feels like he needs to go console with someone else. To me, that’s a big red flag. There should be areas that you feel are outside your expertise. For me, I don’t hold it against another professional if they’re transparent, if they’re upfront and they’ll say, you know what, Steven? I work with a handful of people that have rental properties, but really this is something we need to involve someone else. Geez, I’ll take that as a win from a professional anytime.

Ben (13:44):

Yeah, I think if you’re trying to be everything to everyone, you’re not going to be anything to anyone. I remember early on in my career, I met a guy at one of these kind of networking mixers and he was a real estate agent and he did insurance. He said investments, but I knew in reality it was insurance and car insurance and medicare insurance and long-term care insurance and I’ll sell your house. And I don’t know, and I thought, boy, on one hand he could work with any human that exists on earth, but on the other hand, how could you possibly be? I was just trying to learn the stuff in front of me with investments and it was a lot for a new person to take in. I thought, how on earth could you be an expert in all of those things at once? And now that I’m almost 20 years into my career, I know that it’s probably better to be one mile wide and 10 miles deep than 10 miles wide and one mile deep, especially when you’re dealing with taxes that can have heavy consequences and your life savings.

Steven (14:32):

And I deal with real estate a bit more often than Ben does. This is also an area where I know where my limits are. And so Rob’s clearly very well researched on this topic. He took a step further and started asking questions about things like 1031 exchanges and whether there was other more sophisticated strategies that might make sense. And I really appreciated how Rob is thinking about this because he even included in there of, Hey, I’ve heard these things can have tax advantages, but I’m worried about the complexity. So I’ll give kind of my overview of where the limits of my expertise are in this area. And again, this is going to be an area where we say, if you want to go further than that, you’ve got to find somebody who does this all the time. Because the general idea behind a 1031 exchange is that you’re taking one piece of property and exchanging it for another piece of property, which these are going to be two separate transactions.


We need attorneys involved to make sure it gets structured correctly. But in Rob’s case, you would be selling one rental property and then buying a similar rental property at least as far as the IRS defines it so that you can defer the gain. So in Rob’s situation, he’s got about a $300,000 gain that he’s looking at, Hey, can I defer that for a while? You can’t get rid of it. But through these 1031 exchanges, which are super popular to talk about on social media, we can potentially kick the can on these capital gains. And if you want to be a real estate investor and go really deep into that area, these can be very powerful tools. But Rob’s thinking about this the right way where this isn’t the kind of thing you want to dabble in because it’s got to be something you’re thinking about upfront that you’re structuring correctly upfront.


There’s some windows in there of how close together those transactions have to happen, what those properties have to look like, how it all gets documented. If we do 1031 exchanges in different states, there’s some additional state reporting requirements that can get really cumbersome and similar to other topics we talked about on here, there are administrative hoops you have to jump through, which can be worth it if you have someone on your team’s going to help you navigate those things. And if you get those things all right, but it is not the kind of thing you want to dabble in at the last minute as you’re ready to sell your parental property, you say, wait, let’s check a box somewhere and call this a ten thirty one exchange and hope for the best. When we get into advanced tax planning strategies, that is not a winning approach.

Ben (16:37):

I totally agree, and I think it’s the difference between book knowledge and street knowledge. I know what a 1031 exchange is because I passed a securities exam half my life ago. That doesn’t mean that I’m the right guy to have on your team when you’re looking to do one. I could pass a test maybe about 1031 exchanges, but you want a person on your team that done it dozens of times, not just I memorized something in a textbook 20 years ago. I think there’s a big difference between book knowledge and street knowledge. I’ve done it the 10,000 hours thing where you’re probably not an expert until you’ve practiced something and put significant time into it. So just a red flag. If somebody can explain something, that’s one thing, but I want you to show me a similar client where you’ve delivered this value to time and time again. I think that’s a good differentiator. Head knowledge, book knowledge, and street smarts. 

Steven (17:27):

A couple of quick bullet points for anybody listening who has thought about 1031 exchanges or has a rental property, and this is going to come up at some point, just a couple of quick bullet points to keep in mind. 1031s are absolutely valid tax planning strategies. They get done all the time correctly, and with the IRS’s stamp of approval, one thing that gets missed a lot is that this is deferring taxes. This is not getting rid of taxes. So you just got to keep that in mind that we’re kicking the can down the road, which can be advantageous, but don’t get this twisted that it’s going to make your tax liability completely disappear. There are more administrative hoops you’re going to have to jump through, and you are still going to own property. You can’t 1031 a rental property into a stock holding in Apple stock. They’re not the same thing. It has to be a kind exchange, and there’s a lot of rules around

Ben (18:07):

That. So can I ask you a theory question?

Steven (18:09):

You can ask, we’ll see what my answer’s going to be.

Ben (18:11):

You often say, and I’ll probably butcher the quote, but everything, every line in the tax code has a lobbyist behind it or something like that, right? So what’s the purpose of this if you’re not in real estate? It sort of seems like this is kind of a handout where if you’re a real estate investor, you can get away with paying less taxes. From a financial planner retirement standpoint, I look at it as, well, you can preserve your buying power by not kicking out 15 to 20% in capital gains, but what do you think the purpose is behind? What is the IRS trying to incentivize or what have you with a rule like this? 

Steven (18:44):

We got to keep in mind that the IRS doesn’t come up with the rules. They just write them. So it is congress, it’s lobbyists, it’s people buying votes. Geez, we could talk for hours on this. The concept behind it with whether or not this plays out in reality, I don’t know. I’m not a PhD economist. The concept behind it is exactly what you’re talking about as far as preserving purchasing power. The idea is that if I have a real estate developer who’s got the willingness to invest capital to develop property, to have rentals, whatever it might be, the idea of deferring the gain is to give those people more ability to invest that capital now. Because the alternative would be, I sell it, I get the cash, I pay the taxes, and now I can do whatever I want with it. I don’t have the same incentive to keep investing in capital development.

Ben (19:24):

And with there being kind of a nationwide housing shortage, I guess it makes sense to incentivize that. Yeah, so the first rule of economics, I’m always reminding myself is that humans are motivated by incentives a hundred percent. You see something that doesn’t make sense, you got to, if you try to find the incentive, then sometimes it makes a little bit clearer. But thank you for indulging my out of the blue question.

Steven (19:42):

Yeah, absolutely, Ben, and to everybody listening, again, we love the questions coming in retirement tax podcast.com. Keep sending them our way. We love doing episodes like this. And until next time, remember to not let the tax man hit you where the good Lord split you.

Steven (Disclaimer) (19:54):

Hi everyone. Quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only and should not be taken as specific tax, investment or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.

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