MONEY IRAs

The Best Way to Tap Your IRA In Retirement

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I am 72 years old and subject to mandatory IRA withdrawals. I don’t need all the money for my expenses. What should I do with the leftover money? Jay Kahn, Vienna, VA.

A: You’re in a fortunate position. While there is a real retirement savings crisis for many Americans, there are also people with individual retirement accounts (IRAs) like you who don’t need to tap their nest egg—at least not yet.

Nearly four out of every 10 U.S. households own an IRA, holding more than $5.7 trillion in these accounts, according to a study by the Investment Company Institute. At Vanguard, 20% of investors with an IRA who take a distribution after age 70 ½ put it into another taxable investment account with the company.

The government forces you to start withdrawing your IRA money when you turn 70½ because the IRS wants to collect the income taxes you’ve deferred on the contributions. You must take your first required minimum distribution (RMD) by April of the year after you turn 70½ and by December 31 for subsequent withdrawals.

But there’s no requirement to spend it, and many people like you want to continue to keep growing your money for the future. In that case you have several options, says Tom Mingone, founder and managing partner of Capital Management Group of New York.

First, look at your overall asset allocation and risk tolerance. Add the money to investments where you are underweight, Mingone advises. “You’ll get the most bang for your buck doing that with mutual funds or an exchange traded fund.“

For wealthier investors who are charitably inclined, Mingone recommends doing a direct rollover to a charity. The tax provision would allow you to avoid paying taxes on your RMD by moving it directly from your IRA to a charity. The tax provision expired last year but Congress has extended the rule through 2014 and President Obama is expected to sign it.

You can also gift the money. Putting it into a 529 plan for your grandchildren’s education allows it to grow tax free for many years. Another option is to establish an irrevocable life insurance trust and use the money to pay the premiums. With such a trust, the insurance proceeds won’t be considered part of your estate so your heirs don’t pay taxes on it. “It’s a tax-free, efficient way to leave more to your family,” Mingone says.

Stay away from immediate annuities though. “It’s not that I don’t believe in them, but when you’re already into your 70s, the risk you’ll outlive your capital is diminished,” says Mingone. You’ll be locking in a chunk of money at today’s low interest rates and there’s a shorter period of time to collect. “It’s not a good tradeoff for guaranteed income,” says Mingone.

Beyond investing the extra cash, consider just spending it. Some retirees are reluctant to spend the money they’ve saved for retirement out of fear of running out later on. With retirements that can last 30 years or more, it’s a legitimate worry. “Believe it or not, some people have a hard time spending it down,” says Mingone. But failure to enjoy your hard-earned savings, especially while you are still young enough and in good health to use it, can be a sad outcome too.

If you’ve met all your other financial goals, have some fun. “There’s something to be said for knocking things off the bucket list and enjoying spending your money,” says Mingone.

Update: This story was changed to reflect the Senate passing a bill to extend the IRS rule allowing the direct rollover of an IRA’s required minimum distribution to a charity through 2014.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com

Read next: How Your Earnings Record Affects Your Social Security

MONEY Taxes

7 Tax Credits You Shouldn’t Overlook

Woman learning to use computer in library
Alina Solovyova-Vincent—Getty Images

Pay all the taxes you owe—but not a penny more.

The IRS provides multiple tax credits for low- to moderate-income taxpayers to lower what they owe the government. Unlike tax deductions, which lower your taxable income, tax credits directly lower the amount of money you owe the government.

Let’s go over seven tax credits you may be able to claim to lower your tax bill this year. But first, a quick primer on tax credits and the difference between refundable and nonrefundable credits.

Tax credits: The basics

A tax credit allows you to directly subtract the amount of the credit from your taxes due. Say you are single and had $50,000 in income. Based on the 2014 tax brackets, with the standard deduction and one personal exemption, you would owe a little over $5,819 in taxes. A $5,000 tax credit would cancel out all but $819 of your taxes owed.

There are two types of tax credits: refundable tax credits and nonrefundable tax credits. You can get money back for a refundable tax credit even if you didn’t earn any income or pay any taxes. A nonrefundable tax credit is only applied to your taxes owed.

Let’s say you owe $1,000 in taxes from income during the year, and at the end of the year you claimed a $2,500 tax credit. If the tax credit is refundable, you’ll get $1,500 back from the government. If the tax credit is nonrefundable, then it is deducted from the taxes you owe — so in this example, you don’t owe the government anything, but you can only zero out your taxes, meaning you miss out on the remaining $1,500 of the tax credit.

The IRS provides multiple tax credits to lower what you owe the government; see if you can take advantage of any of them.

1. Lifetime Learning Credit (nonrefundable)

The Lifetime Learning Credit allows taxpayers who take postsecondary school classes, or whose dependents take postsecondary school classes, to claim as a tax credit 20% of qualified education expenses up to a maximum $2,000 tax credit. The advantage of this tax credit is that it is open to anyone at any point in his or her life, unlike the American Opportunity Tax Credit, which I will detail next.

The full Lifetime Learning Credit is only available to individual taxpayers who make $52,000 or less, or $104,000 for a married couple filing jointly. The credit phases out for individual taxpayers with income between $52,000 and $62,000 and married couples filing jointly with income between $104,000 and $124,000. Those who earn more than the upper threshold are ineligible for the Lifetime Learning Credit.

2. American Opportunity Tax Credit (partially refundable)

The American Opportunity Tax Credit differs from the Lifetime Learning Credit in that it is only available for eligible students for their first four years of higher education. The credit allows you to claim up to $2,500 per eligible student. Forty percent of the credit is refundable, so there is a maximum refund of $1,000. You cannot claim both this credit and the Lifetime Learning Credit for the same student in one tax year. The full American Opportunity Tax Credit is available to individuals with incomes less than $80,000 ($160,000 for married couples filing jointly), and the credit phases out for individuals with incomes of more than $90,000 ($180,000 for married couples filing jointly).

3. Retirement Saver’s Tax Credit (nonrefundable)

For low-income taxpayers who are not full-time students, the government provides a tax credit for contributing to a retirement savings plan such as an IRA, 401(k), etc. The credit is anywhere from 10% to 50% of up to $2,000 of your retirement plan contributions (or $4,000 for married couples filing jointly).

Source: IRS

4. Earned Income Tax Credit (refundable)

The Earned Income Tax Credit is a refundable tax credit for low- to moderate-income working taxpayers to raise their incomes without discouraging work. The income limit for an individual is $14,590 but rises significantly for each child you can claim as a dependent. You can read more about the earned income tax credit here.

5. Child Tax Credit (depends)

The Child Tax Credit provides up to $1,000 per qualifying child for individual taxpayers with income less than $75,000 (or $110,000 for married filing jointly). The child tax credit is nonrefundable, however, for taxpayers whose child tax credit is less than $1,000 per child there is an additional child tax credit that is refundable that can raise the two tax credits to a total of $1,000 per qualifying child. You can read more about the child tax credit here.

6. Premium Tax Credit (refundable)

The Premium Tax Credit is for low- to moderate-income taxpayers who get health insurance through the health insurance exchanges, i.e., Obamacare. To be eligible for the credit, you must buy health insurance through the exchange, be ineligible for coverage through an employer or government plan, not be married filing separately, and meet certain income limits. The Premium Tax Credit has both minimum and maximum income limits, because if your income falls below a certain level, you are eligible for Medicaid. Your household income must be between 100% and 400% of the federal poverty line — the current dollar amounts of these limits, which change with family size, are shown below:

Poverty Level Individual Family of 2 Family of 4
100% $11,490 $15,510 $23,550
400% $45,960 $62,040 $94,200

Source: IRS.

To estimate your premium tax credit, it is best to use an online calculator. Note that Obamacare contains a penalty for not having insurance unless you meet certain exemptions. Motley Fool contributor Todd Campbell recently examined how much Obamacare penalizes you for not having health insurance.

7. Elderly and Disabled Tax Credit (nonrefundable)

The Elderly and Disabled Tax Credit is for low-income taxpayers over age 65 or those who are retired on permanent and total disability and received taxable disability income during the tax year. Eligibility is rather strict. To qualify for the elderly and disabled tax credit, individual taxpayers must have income less than $17,500 ($25,000 for married filing jointly) and nontaxable income (nontaxable Social Security, pension, annuities, or disability income) of less than $5,000 ($7,500 for married filing jointly). The tax credit can theoretically be as high as $500, but the calculations for the credit are complicated enough that the IRS will do them for you if you ask. You can read more about the Elderly and Disabled Tax Credit Here.

More ways to reduce your taxes

As Mitt Romney famously (or infamously, depending on whom you ask) said: “I pay all the taxes owed. And not a penny more.” Whatever your political leanings, those are wise words to live by. The U.S. tax code contains multiple ways to lower what you owe the government. Be sure you don’t end up paying more than what you should really owe.

MONEY retirement income

Retirees Risk Blowing IRA Deadline and Paying Huge Penalties

Egg timer
Esben Emborg—Getty Images

With just seven weeks left in the year, most IRA owners required to pull money out have not yet done so.

Two-thirds of IRA owners required to take money out of their account by Dec. 31 have yet to fulfill the obligation, new research by Fidelity shows. Now, with the year-end in sight, and thoughts pivoting to holiday shopping and get-togethers, legions of senior savers risk getting distracted–and socked with a punishing tax penalty.

IRA owners often wait until late in the year to pull out their required minimum distributions. Especially at a time when interest rates are low and the stock market has been rising, leaving your money in an IRA as long as possible makes sense. Some retirees may also be reluctant to take distributions for fear of spending the money and running short over time.

But blowing the annual deadline can be costly. The IRS sets a schedule of required minimum distributions, or RMDs, to keep savers from deferring taxes indefinitely. After reaching age 70 1/2, IRA owners must begin to take money out of their account each year and pay income tax on the amount. Failure to pull money out triggers a hefty penalty equal to 50% of the amount you were supposed to take out of the account.

Among 750,000 IRA accounts where distributions are required, 68% have yet to take the full amount and 56% have yet to take anything at all, Fidelity found. These IRA owners should begin the process now to avoid end-of-year distractions and potential mistakes like using the wrong form or providing the wrong mailing address, which can take weeks to find and correct.

A report by the Treasury Inspector General estimated that as many as 250,000 IRA owners each year miss the deadline, failing to take required minimum distributions totaling about $350 million. That generates potential tax penalties totaling $175 million. The vast majority of those who fail to take their minimum distributions are thought to do so as part of an honest mistake, and previously the IRS hasn’t always been eager to sock seniors with a penalty. But the IRS began a crackdown on missed distributions a few years ago. Don’t look for leniency if you miss the deadline without a good reason, like protracted illness or a natural disaster.

Early each year, your financial institution should notify you of any required distributions you must take by year-end. If this is the first year you are taking a required distribution, you have until April 1 to do so, but then only until Dec. 31 every subsequent year. Once notified, you still need to initiate a distribution. A lot of people simply do not read their mail and fail to initiate action in time.

Among other reasons IRA owners miss the deadline:

  • Switching their account Institutions that open an account during the year are not required to notify new account holders of required minimum distributions until the following year.
  • Death Often there is confusion about inherited IRAs. The beneficiary must complete the deceased IRA owner’s distributions in the year of death. Non-spousal beneficiaries of any age must begin taking distributions in the year following the year that the IRA owner died—and no notice of this is required.

With the penalties so stiff and the IRS cracking down on missed mandatory distributions, this is a subject that seniors and their adult children should talk about. In general, financial talk between the generations makes seniors feel less anxious and more prepared anyway. Required distributions can be especially confusing, and the penalties may have the effect of taking away money that heirs stand to receive. So it’s in everyone’s interest to get it right. Consider putting mandatory distributions on autopilot with a firm that will make the calculation and send you the money on a schedule you choose.

Related:

How will my IRAs be taxed in retirement?

Are there any exceptions to the traditional IRA withdrawal rules?

When can I take money out of my IRA without penalty?

MONEY Ask the Expert

Here’s a Smart Way To Boost Your Tax-Free Retirement Savings

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q: I am maxing out my 401(k). I understand there’s a new way to make after-tax contributions to a Roth IRA. How does that work?

A: You can thank the IRS for what is essentially a huge tax break for higher-income retirement savers, especially folks like yourself who are already maxing out contributions to tax-sheltered retirement plans.

A recent ruling by the IRS allows eligible workers to easily move after-tax contributions from their 401(k) or 403(b) plan to Roth IRAs when they exit their company plan. “With this new ruling, retirement savers are getting a huge increase in their ability contribute to a Roth IRA,” says Brian Holmes, president and CEO of investment advisory firm Signature Estate and Investment Advisors.

The Roth is a valuable income stream in retirement because contributions are after-tax, which means you don’t owe Uncle Sam anything on the money you withdraw. Unlike traditional IRAs which require you to start withdrawing money once you turn 70 ½, Roths have no mandatory distribution requirements, so your investments can continue to grow tax-free. And if you need to take a chunk out for a sudden big expense, such as medical bills, the withdrawal won’t bump you up into a higher tax bracket.

For high-income earners, the IRS ruling is especially good news. Singles with an adjusted gross income of $129,000 or more can’t directly contribute to a Roth IRA; for married couples, the income cap is $191,000. If you are are eligible to contribute to a Roth IRA, you can’t contribute more than $5,500 this year or next ($6,500 for people over 50). The IRS does allow people to convert traditional IRAs to Roth IRAs but you must pay income tax on your gains.

Now, with this new IRS ruling, you can put a lot more into a Roth by diverting your 401(k) assets into one. The annual limit on pre-tax contributions to 401(k) plans is $17,500 and $23,000 for people over 50; those limits rise to $18,000 and $24,000 next year. Including your pre-tax and post-tax contributions, as well as pre-tax employer matches, the total amount a worker can save in 401(k) and 403(b) plans is $52,000 and $57,500 for those 50 and older. (That amount will rise to $53,000 and $59,000 respectively in 2015.) When you leave your employer, you can separate the after-tax money and send it directly to a Roth, which can boost your tax-free savings by tens of thousands of dollars.

To take advantage of the new rule, your employer plan must allow after-tax contributions to your 401(k). About 53% of 401(k) plans allow both pre-tax and after- tax contributions, according to Rick Meigs, president of the 401(k) Help Center. You must also first max out your pre-tax contributions. The transfer to a Roth must be done at the same time you roll your existing 401(k)’s pre-tax savings into a traditional IRA.

The ability to put away more in a Roth is also good for people who want to leave money to heirs. Inherited Roth IRAs are free of tax, and because they don’t have taxable minimum required distributions, they can give your heirs decades of tax-free growth. “It’s absolutely the best asset to die with if you want to leave money behind,” says Holmes.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: 4 Disastrous Retirement Mistakes and How to Avoid Them

MONEY capital gains

How the IRS Taxes Stock You Didn’t Buy

Investing illustration
Robert A. Di Ieso, Jr.

Q: I received some shares of stock some years ago that were given to me as part of an agreement through a class-action lawsuit. Do I have to pay taxes on these shares when I sell? — Bob from Livingston, Tex.

A: In most instances, you would, says Michael Eisenberg, a certified public accountant in Los Angeles.

When you receive stock in lieu of cash for payment for services rendered or, in this case, a settlement, you’ll first owe income tax based on the value of the stock at that time. “Compensation is compensation, whether it’s cash or stock,” says Eisenberg. “It’s considered ordinary income.”

If you later sell the stock for a profit, you’ll also owe capital gains tax. How much you owe is based on the difference in value from the time you received the stock and the time you sold it, after accounting for such things as dividends, stock splits or capital distributions. This is called “basis.”

If you own the stock for less than 366 days – one year plus a day – your capital gains rate will be based on your income tax rate. If you own it longer, you’ll pay a lower rate.

Taxpayers in most brackets are taxed at 15% for long-term gains. Those in the 10% or 15% bracket may owe no long-term capital gains tax, while those in the 39.6% rate will need to pay up at 20%.

Are there any exceptions?

If for some reason this stock was given to you as a result of a class-action related to your retirement account, you may not owe tax. “If the stock settlement was applied to your IRA, it wouldn’t be taxable,” says Eisenberg, though such an example is pretty rare.

What if you receive stock as a gift or an inheritance?

In this case, you won’t owe income tax on that gift. You will, however, still owe capital gains tax when you sell.

If the stock is part of an inheritance, your capital gains rate will be based on the value of the stock at the time the original owner passed away. If your Granny gifts you stock while she’s still alive, however, your basis is based on when she bought the stock.

MONEY Taxes

IRS Eases Rules on Ebola Donations

The Internal Revenue Service has cut taxes on Ebola relief and simplified making contributions to fight the outbreak.

MONEY Taxes

How to Never Miss Out On One Valuable Tax Break

Odometer
James F. Dean—Getty Images

Workers who drive a lot for business can write off the costs. These three tools can make tracking those miles on the road easier.

More than 40 million Americans earn money while driving around in their cars, making them eligible for a valuable business mileage deduction from the Internal Revenue Service.

At 56¢ a mile, less than two business miles equals a dollar. So for someone driving 25,000 business miles a year, $14,000 in deductions is at stake.

Keeping an accurate mileage log used to be an arduous task involving a notepad and paper, but most people do not bother with the work. Many recreate their trips after the fact. Some just make it up. Do it wrong and you could get an audit.

“Getting a lot of round numbers means people either aren’t tracking or are rounding,” says P.J. Wallin, 33, a certified public account from Richmond, Virginia.

Bill Nemeth, an enrolled agent who represents clients in IRS audits, says most of his clients tend to exaggerate their business mileage and, when audited, it can be challenge to try to prove they actually drove the miles. Nemeth says he even uses Carfax reports from cars that clients have sold in order to document the actual mileage of the vehicles. In more than 25 years of doing taxes, Nemeth can recall only one client who presented a log that was clearly used daily.

MileIQ, which sells a GPS device that helps track mileage, surveyed about 1,000 of its users and found that only 36% of them had kept a written log previously. Another 18% admitted to making up numbers after the fact, 15% said they did nothing with their mileage, and 11% said they used their calendars to go back and recreate driving distances.

But in today’s highly automated world, apps and standalone GPS devices take the work out of the process, so there are no more excuses. Prices and functions vary, and some personal preference is involved.

Here are three different approaches – all of which are tax-deductible as a work expense.

MileIQ

This iPhone app (scheduled to be out soon for Androids) promises to be more automated than its cousins—always running in the background. It costs $5.99 a month or $59.99 a year. Lighter drivers, however, can use it for free. Users can log 40 drives a month before they would have to take a paid subscription, so you can take it for a test drive.

The idea is that the app does most of the work, although eventually users have to look over the results and eliminate listings that were not for business. Data from the app is regularly uploaded to the cloud, and reports sent automatically via email. Users can also customize the data.

MileIQ co-founder Charles Dietrich says the app actually learns from patterns and increasingly knows when a trip is of the reimbursable sort and when it is not.

Easy Mile Log

This device, which costs $149, is a small GPS tracking device you leave in your car. When you start a drive, press a button to note the trip is either work or personal. It will document the date and time of your travels, where you started, where you went and the distance. You can dump the data from the device onto your computer using a USB cord.

EasyBiz Mileage Tracker

At $2.99, EasyBiz Mileage Tracker is a cheaper app option, but not quite as automated as the others. Instead, it relies on the user to create what is basically a computer-assisted mileage log – starting and stopping each trip, while it notes the location and the distance via GPS.

Mileage Tracker allows users to customize report printing and add other entries – like tolls, for instance – that could come in handy when doing mileage reports.

MONEY Taxes

IRS Bumps Up Retirement Fund Contribution Limits

You can now save more in your tax-deferred retirement accounts.

Good news: The IRS has bumped up retirement account contribution limits for 2015 to reflect cost-of-living increases. So if you’ve been wanting to sock away more in your tax-advantaged accounts, next year is your opportunity.

Today’s announcement raises the annual contribution limit for 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan by $500 to $18,000. The catch-up contribution limit for employees over age 50 also increased from $5,500 to $6,000.

IRA contribution limits and IRA catch-up contributions, however, will remain the same, at $5,500 and $1,000, respectively, meaning older workers can still set aside $6,500 a year in these accounts.

This follows Wednesday’s announcement that retirees will see a 1.7% cost-of-living bump in their Social Security benefits next year.

Contribution limits are reviewed and adjusted annually to reflect inflation and cost-of-living increases. Last year, 401(k) and IRA limits remained unchanged from 2013 levels because the Consumer Price Index had not risen enough to warrant an increase.

For more details about the changes and more information about the new gross adjusted income limits for certain tax deductions, see the table below or the IRS website.

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Read more from the Ultimate Retirement Guide:

 

TIME faith

Is Alliance Defending Freedom the Next Hobby Lobby?

God Meets Profit as Justices Weigh Obamacare Contraceptive Rule
Paul Clement, lawyer arguing before the U.S. Supreme Court on behalf of Hobby Lobby Stores Inc. and Conestoga Wood Specialties Corp., center, speaks to the media with David Cortman, senior counsel and vice-president of religious liberty with Alliance Defending Freedom, right, following arguments in Washington, D.C., U.S., on Tuesday, March 25, 2014. Bloomberg—Bloomberg via Getty Images

Eric Yoffie was President of the Union for Reform Judaism from 1996 to 2012.

If a church or its religious leader wants to enter the partisan political fray and support a specific candidate, that is one step too far

Electioneering from the pulpit is a very bad idea, but champions of this particular bad idea seem to feel that its time has come. Let’s hope, for the sake of religion in America, that they are wrong.

On October 5, referred to by its organizers as “Pulpit Freedom Sunday,” more than 1,500 pastors preached sermons about political candidates and their views on matters before the electorate. The day was organized by Alliance Defending Freedom, a group that advocates the absolute right of clergy to endorse candidates or parties without interference from the government or the IRS.

According to IRS regulations, churches can speak out on issues and values; however, they are forbidden to participate in political campaigns or to intervene in any way on behalf of any political candidate. A pastor can give a sermon on poverty or health care, but violates IRS policy if he endorses a candidate. Breaking these rules can lead to the revocation of the church’s tax-exempt status.

The rules, supported by most Americans, are eminently sensible. Freedom of speech and religion are guaranteed by the Constitution, and a priest, rabbi or imam can say whatever he or she pleases from the pulpit. But the Constitution does not guarantee places of worship the benefits of tax exemption, which are considerable. According to Dylan Matthews in the Washington Post, these subsidies cost the government $80 billion in revenue every year. In short, the American people value religion and are prepared, by way of their government’s taxing authority, to foot the bill for much of the good work that places of worship do. But if a church or its religious leader wants to enter the partisan political fray and support a specific candidate, that is one step too far. In that case, the church is required to give up its tax exemption and pay for its electioneering itself.

But the Alliance disagrees. It contends that freedom of religion confers on clergy the right to endorse local, state and national candidates from the pulpit while their churches retain all of their tax benefits. And the purpose of its current campaign is to prod the IRS into taking action against a pastor who violates the rules, thereby generating a test case that it can carry to the U.S. Supreme Court.

One would like to think that the efforts of the Alliance are doomed to failure. Indeed, for most of the last half century, such a campaign would have seemed fanciful, if not absurd. Its goal, after all, is contrary to both established practice and common sense. Nonetheless, there is reason for concern.

In the first place, the IRS has not consistently enforced its own policies. While the overwhelming majority of clergy do not endorse political candidates, there are exceptions; conservative, Evangelical churches, such as those organized by the Alliance, are one example, and left-leaning African-American churches are another. It’s interesting that Pulpit Freedom Sunday was also the day that New York Governor Andrew Cuomo, running for a second term, visited churches in Queens and Brooklyn to ask for support from black congregants. At the Greater Allen A.M.E. Cathedral in Jamaica, Queens, the Rev. Floyd H. Flake, a former congressman, expressed his support for Cuomo, offering the equivalent of a political endorsement if not a formal one.

Part of the issue seems to be that the IRS does not want a challenge in the courts. Therefore, it has refused to be goaded into taking action by the law breakers, and in particular by the Pulpit Freedom Sunday participants, who have been holding an annual event and growing in numbers for six years. But ignoring enforcement is always a bad strategy. It breeds disrespect for the law and encourages more pulpit law breaking from every political direction.

In the second place, if the IRS finally stands its ground and the result is a legal challenge that reaches the Supreme Court, it is more likely now than before that the Supreme Court will be sympathetic to the Alliance arguments. In Burwell v. Hobby Lobby Stores, Inc., arguably the most significant case of the Supreme Court term, the Court granted a special status to religious objectors and religious freedom that was seemingly without basis in precedent. This is good in some ways, but not so good in others; freedom of religion is not absolute and needs to be balanced against other rights and freedoms. It is hard to imagine the legal grounds for a decision that would grant churches the unrestricted right to enter the political process while still benefiting from the financial largesse of the taxpayer, but such an outcome is no longer impossible.

Once ministers, priests, rabbis and imams are entitled to endorse candidates without restriction, they will be increasingly pressured to do so. The same people who pour money into political campaigns will direct their dollars to houses of worship. And churches, synagogues and mosques will no longer be places of worship; they will be political bazaars.

Rabbi Eric H. Yoffie, a writer and lecturer, was President of the Union for Reform Judaism from 1996 to 2012. His writings are collected at ericyoffie.com.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

MONEY Taxes

4 Myths About the Home Office Tax Deduction

Man in home office
Make your home office work for you. Thomas Barwick—Getty Images

Misconceptions about the home office deduction cause Americans to lose out on significant savings.

One of my favorite tax perks available to real estate investors as well as many other professionals is the home office deduction. It allows you to shift what would otherwise be personal non-deductible expenses into legitimate business write-offs. Although the break is not going to rank as your largest, it can provide you with a worthwhile amount of savings when used correctly.

For example, if you repainted your entire house for $8,000, and your home office accounts for 20% of your space, $1,600 ($8,000 x 20%) is now a legitimate tax deduction.

I am still surprised by how many people I meet who qualify for the deduction but do not take it, I suspect because of incorrect information.

Here are four common myths about the home office deduction, and why they should not deter you from nabbing the savings.

1. You need a room where you work solely on business activities- and nothing else.

It is true that you need a part of your home that is used exclusively for business purposes. That said, it doesn’t have to be a full room. If you have an area within a room where you review your property management reports, that should qualify. Just make sure the separation is clear, perhaps with a partition.

What doesn’t work: if you use your dining table to run your businesses, since its primary function is to eat. Some people tell me they never dine at the table and only work from it. Still, even in that case, I recommend not claiming your dining room or dining table as your home office. The IRS has successfully challenged in court homeowners who have tried that argument.

Related: What Can I Deduct? The Answer That Will Save You on Real Estate Taxes

2. Your home must be the only place you do business.

Often people don’t take the deduction if they have another office where they can work from time to time. Yet the IRS specifies that your home office must be the “principal” place of business, but not the only one. Thus even if you have access to other offices you’ll still qualify, assuming you do most of your work in your home.

Here is an example: I met recently with a client who owns some out-of-state rental houses, which are cared for by a local property management company. As an investor, he simply reviews the management reports and deals with the professional caretaker from his home office. Previously he never took a home office deduction because he was told that his home did not count as the primary place of business, since a property management company cared for the homes and it was located outside the state. But he got bad information. As long as you are managing your properties from your home office, the fact that you have property managers out-of-state won’t disqualify you.

3. Taking the deduction is complex.

Starting in 2013 the IRS simplified the method for calculating home office write-offs. Anyone who fails to keep precise records will appreciate the new rules.

Rather than holding onto receipts and calculating your actual expenses, you can instead opt for a standard deduction of $5 per square foot, up to 300 square feet, for a total annual write-off of up to $1,500. So you have no tasks over the course of the year.

Related: 7 Common Tax Mistakes of New Real Estate Investors

4. You’re more likely to get audited.

One of the most common myths is that taking the deduction flags to the IRS that you should be audited. But that isn’t true today. Changes to the rules, including the new simplified method introduced in 2013, have made it easier for people who truly work out of their homes to qualify. What’s more, research shows that close to half of Americans have home offices that they work from at some point during their lifetime.

Missed taking the deduction last year? Even if you already filed your tax returns and only now realize that your home office is eligible, simply file an amended return for last year to claim your refund.

 

More from BiggerPockets:
4 Foolproof Steps to Painlessly Resolve Tenant Complaints

10 Surefire Ways to Fail As a Beginning Real Estate Investor

5 Secrets to Increasing the Profit of Your Rental

 

Another version of this article originally appeared on BiggerPockets, the real estate investing social network. © 2014 BiggerPockets Inc.

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