MONEY retirement income

The New Way to Get IRA Income

Thanks to a government rule on annuities, retirees can be rewarded for their patience.

For years, financial planners have touted the benefits of longevity annuities for retirees. Now a new IRS rule has made these income generators an even better deal.

With a longevity annuity—also called a deferred income annuity or longevity insurance—you pay a lump sum in return for monthly income for life, starting at some future date. Because the issuer assumes that—let’s just say it—some buyers will die before they start receiving money, or soon after they do, your monthly check will be far more than you would receive from an immediate annuity costing the same (see the chart below). A longevity annuity’s larger, delayed payout helps hedge against the risk of outliving your money. It also frees you up to invest more aggressively in the rest of your portfolio, because you know you’ll have this income later on.

Under a rule passed last year, if you use IRA funds to buy a longevity annuity meeting certain IRS guidelines, its cost—up to $125,000 or 25% of your account, whichever is less—won’t be used in calculating the required minimum distributions you have to take from your retirement account starting at age 70½. Such a qualified longevity annuity contract, or QLAC, as it’s known, lets you leave more money to continue growing tax-free in your portfolio. To decide whether a longevity annuity is right for you, follow these steps:

Assess your cash situation. As useful as the annuity can be, you have to balance that future income stream with your need for money that you can tap for emergencies, either now or later. So commit only a small portion of your portfolio— no more than 20%—to a deferred annuity, suggests Michael Finke, financial planning professor at Texas Tech. “The sweet spot for buying a deferred annuity is $500,000 to $1 million or more in retirement assets,” he says. Less than that, and you won’t be able to purchase much income; more than that, and you can likely fund your future needs without annuitizing.

RIA_pays_delay_graphic

Make sure you can wait. Some buyers of longevity insurance are workers who plan to defer their annuity only until they retire, often within 10 years. But to maximize your benefit, defer 15 years or longer and wait until you’re in your seventies or eighties. Otherwise, you won’t get a big income bump from the issuer’s expectation that a certain number of buyers like you won’t collect. “If you can’t afford to wait more than a few years, there’s not much advantage over an immediate annuity,” says York University finance professor Moshe Milevsky.

Get ready to research. Several insurance companies have started selling QLACs, including Principal Financial and American General. You can get quotes for them at ImmediateAnnuities.com or through Vanguard and Fidelity.

So your money will be there when you need it, stick with insurers rated A+ or better by A.M. Best or Standard & Poor’s, says Coral Gables, Fla., financial planner Harold Evensky. After all, the whole point is to have fewer financial worries in retirement.

Read more about annuities:
What is an immediate annuity?
How do I know if buying an annuity is right for me?
What payout options do I have?

MONEY IRS

IRS Cyberattack Was 3 Times Worse Than Previously Revealed

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KAREN BLEIER—AFP/Getty Images A sign outside the Internal Revenue Service is seen August 8, 2015 in Washington, DC.

Hackers stole tax return information from 334,000 taxpayers, according to a new review.

The U.S. Internal Revenue Service (IRS) said Monday a hacking attack into one of its computer databases revealed in May was much more extensive than previously thought, with nearly three times as many taxpayers hit by data theft.

The IRS said in late May the tax return information of about 114,000 U.S. taxpayers had been illegally accessed by cyber criminals over the preceding four months, with another 111,000 unsuccessful attempts made.

A new review has identified 220,000 additional incidents where data was breached, the tax collection agency said. It identified another 170,000 suspected failed attempts by third parties to gain access to taxpayer data.

The attackers sought to gain access to personal tax information through the agency’s “Get Transcript” online application, which allowed taxpayers to call up information from previous returns. The system was shut down after the May attacks.

“The IRS believes some of this information may have been gathered for potentially filing fraudulent tax returns during the upcoming 2016 filing season,” the agency said in a statement.

What Should I Do If I Have Been a Victim of a Data Breach?

It added that it will soon begin mailing letters in the next few days to the taxpayers whose accounts may have been accessed, offering them free credit monitoring and a new personal identification number to verify the authenticity of next year’s tax returns.

In May, the agency said that as a result of the breach, some 15,000 fraudulent returns were processed in the 2015 tax filing season, likely resulting in refunds of less than $50 million.

An IRS official said the agency was reviewing whether the number of fraudulent returns had grown due to the more extensive data breaches, but that requires a manual review of the individual returns.

Read next: What Should I Do If I Have Been the Victim of Identity Theft?

TIME cybersecurity

IRS Says More Taxpayers May Have Been Hacked

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Getty Images

The Internal Revenue Service said Monday that a hack of its computer databases was far more extensive than previously believed, with more than 300,000 taxpayer accounts now possibly affected by identify thieves.

The IRS said in May that cyber thieves used stolen Social Security numbers and other data to try to gain access to prior-year tax return data for about 225,000 U.S. households, which included 114,000 successful attempts.

But on Monday, the agency said that an additional 390,000 households were targeted, including about 220,000 “where there were instances of possible or potential access” to prior-year return data, the Wall Street Journal reports. There were also some 170,000 additional instances of “suspected attempts that failed to clear the authentication processes,” the IRS added.

The IRS said it would move quickly to notify targeted taxpayers, as well as offer free credit protection. In order to successfully gain access to taxpayers’ information, hackers must pass a multistep process that includes intimate knowledge of the taxpayer, including Social Security numbers, date of birth, tax filing status and street address, as well as answer personal questions such as “What was your high school mascot?”

The IRS said Monday it is expanding its security measures for its ‘Get Transcript’ option, the feature which allows taxpayers to access their tax returns. “The IRS takes the security of taxpayer data extremely seriously, and we are working to continue to strengthen security for `Get Transcript,’ including by enhancing taxpayer-identity authentication protocols,” the IRS said.

[WSJ]


 

MONEY

Consumer Complaints About This Troubling Scam Have Soared

Behold the year's top consumer complaints.

Identity theft was the fastest-growing consumer complaint in 2014, according to a joint annual report by the Consumer Federation of America and North American Consumer Protection Investigators. The list is based on more than 280,000 claims made to 37 consumer-protection agencies in 21 states last year.

Recent, large-scale data breaches at major retailers are at least partly to blame for the rapid rise of identity theft complaints. (It also was the top consumer gripe handled by the Federal Trade Commission last year, making up 13% of all complaints.)

Read next: 10 Funniest & Most Creative Consumer Complaints Ever

Consumer agencies say that stealing someone’s identity to claim their tax refunds, in particular, is a growing problem. “Refund fraud caused by identity theft is one of the biggest challenges facing the IRS,” says the agency, which has 3,000 employees working on tax-related identity theft.

The 37 agencies the two groups canvassed deemed debt collection the worst category overall for consumer complaints, based on a combination of complaint frequency, the dollar amounts involved and how severely vulnerable populations were affected. In some cases, people were hounded to pay debts that weren’t theirs.

“They make harassing phone calls or send threatening emails to scare consumers… to satisfy a loan that doesn’t exist,” the groups’ report says. Other victims who filed complaints with state and local agencies said they were subject to abusive language and other illegal practices from debt collectors, such as threatening them with arrest or calling late at night. (By law, these agencies aren’t supposed to call after 9 p.m.)

Some complaint categories are perennial hot buttons. As in 2013, automotive-related issues were the most frequently reported to protection agencies last year, including, “misrepresentations in advertising or sales of new and used cars, lemons, faulty repairs, leasing and towing disputes,” the CFA says. Other mainstays in terms of generating complaints include telemarketing robocalls, construction and home improvement firms, landlord-tenant disputes and shady retail practices like false advertising or issues with gift cards or coupons.

There were plenty of new contenders causing major consumer headaches last year, too. Consumer protection agencies reported an influx of complaints about student loan repayment or consolidation scams, and businesses refusing to honor customer agreements such as rebates, gift certificates and contracts after changing hands, sometimes even though the businesses retained their old names.

“A good recent example is gyms that have closed and be reopened by other, larger corporations,” says Ethel Newlin of the San Francisco District Attorney’s office. In some cases, she says, “Consumers were left with worthless contracts for the rest of the term they had already paid for.”

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MONEY Taxes

IRS Customer Service Is Even Worse Than You Thought

person asleep with phone on desk
Ranald Mackechnie—Getty Images

Fewer than half of taxpayer phone calls were answered.

If you tried to call the IRS for help during the recent tax season but failed to get through to anyone, you are in good company. In fact, you’re in the majority.

According to a new report from the Taxpayer Advocate Service, only 37% of the calls made to IRS customer service from January 1 to April 18, 2015, were actually answered. The average wait time for those who did manage to get through to customer service was 23 minutes.

“This level of service represents a sharp drop-off from the 2014 filing season, when the IRS answered 71 percent of its calls and hold times averaged about 14 minutes,” the report states.

What’s more, the IRS increased the rate at which it automatically hung up on callers to an astonishing degree. “Courtesy disconnects,” the term used for when a call is terminated because the switchboard is overloaded, hit 8.8 million during the 2015 filing season. That’s a rise of more than 1,500% compared to 2014, when there were 544,000 such disconnects.

Taxpayers who had good reason to be concerned about identity theft were treated especially poorly by the IRS, which answered only 17% of the calls from those who had been notified that their returns had been blocked due to suspicion of identity theft. Hold times averaged 28 minutes for those who got through. For three consecutive weeks during the filing season—presumably, during a period soon after many taxpayers were notified of the identity theft concerns—less 10% of these calls were answered.

The blame for the abysmal performance can be credited to factors including budget cuts that decreased staffing and increased calls from taxpayers—both of which led to longer wait times, which in turn probably led to more callers hanging up.

In a released statement, National Taxpayer Advocate Nina Olson described the filing season as “generally successful” for “the majority of taxpayers who filed their returns and did not require IRS assistance.” But it was a very different story for anyone hoping to ask the IRS a question or two: “For the segment of taxpayers who required help from the IRS, the filing season was by far the worst in memory.”

MONEY Taxes

Why You Can Stop Worrying About the Gift Tax

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Tiina & Geir—Getty Images

You're more likely to be mauled to death by a unicorn than to actually pay gift tax to the federal government.

Most taxpayers will never have to pay federal gift tax regardless of the size of the gift.

I frequently get questions from clients wanting to know how much they can give to their children without incurring “gift tax.” So let’s clear this up: For 99.8% of Americans, under current tax law you are more likely to be mauled to death by a unicorn than to actually pay gift tax to the federal government.

The gift tax was designed to prevent people from avoiding federal estate tax by simply giving their money away prior to death. Here is how the gift tax works.

If you give more than a certain amount in a given year to any one individual (this amount is called the annual gift tax exclusion, and it’s $14,000 in 2015), you are supposed to file a gift tax return. If you are married, you and your spouse can each give $14,000 to an individual each year. That means you can give a combined $28,000 to as many people as you like. Most people understand this part but then fret over what happens if they want to give more than the annual exclusion.

Well, as I already mentioned, if you give more than the annual exclusion amount, you are supposed to file a gift tax return. However, that does not mean you owe any tax to the government. Remember that the gift tax was designed to keep people from avoiding estate tax. Federal estate tax applies only to estates of more than $5.43 million ($10.86 million for couples), and the gift tax shares this “unified credit” with the estate tax. Therefore, when you file a gift tax return, you can either pay the tax out of your own pocket or apply part of your unified credit toward the gift and erase the tax.

This essentially means that the only people who actually pay gift tax to the government are people with very large estates — the 0.2% whose estates are larger than the unified credit amount. Anyone else will file a gift tax return and use part of their $5.43 million or $10.86 million unified credit to avoid gift tax.

This means that a married couple making a $100,000 gift to someone — a child, say — settles with the IRS as follows:

Gift: $100,000

Minus annual exclusion amount: $28,000 (2 x $14,000)

Taxable gift: $72,000

Unified credit (for married couple): $10.86 million

Minus credit used to avoid gift tax: $72,000

Remaining credit: $10.14 million.

So unless you plan to leave more than $5 million or $10 million to your kids at death, worrying about gift tax should be the furthest thing from your mind! But watch out for renegade unicorns. I hear they get aggressive during mating season.

More From NerdWallet:

MONEY Social Security

Are Social Security Benefits Taxable?

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Rubberball/Mike Kemp—Getty Images/Rubberball

Your marital status, total income and location all come into play.

Saving for retirement is a crucial part of preparing for your financial future — but that doesn’t mean you shouldn’t plan for Social Security benefits. You can calculate what your Social Security income will be to help provide an estimate of your benefits and what other savings you will need to lead the lifestyle you want in retirement. While you may have heard about a time when these payouts were tax-free, that is no longer the case. In short, Social Security benefits are taxable. But in reality, it is not that simple — taxability depends on marital status, total income and location. If you have some additional retirement income, besides Social Security, coming from a salary, pension, IRA or 401(k), you will likely be over the income limits and can expect that up to 85% of your Social Security benefits will be taxable.

Income Limits

The portion of your benefits you are taxed on depends upon your income. The Internal Revenue Service sets limits for calculating tax liability every year. In 2015, you will pay income taxes on up to 50% of your benefits if you are filing as an individual with combined income between $25,000 and $34,000. If you have more than $34,000 in combined income, you could be subject to taxes on up to 85% of your benefits. For couples, the amounts are $32,000 and $44,000 for up to 50% and about $44,000 for up to 85%. In this case, “combined income” means the total of your adjusted gross income, the nontaxable interest and half of your Social Security benefits. If Social Security benefits are your only source of income and your total is below $25,000, your benefits will not be taxed at all — but you may not have the comfortable retirement you imagined.

Federal & State Taxes

If you will have to pay taxes on your benefits, up to 85% every dollar of income you make over the limit will be subject to federal income tax. This can get complicated to predict, so the IRS offers a worksheet and e-file software to help you calculate your Social Security tax liability. It’s a good idea to check with your local tax pro or an accountant about state and local taxes because the rules vary by location. Some states offer exemptions and credits based on age or income and at least some Social Security is tax-exempt in most states, but there is usually a range.

Simplifying the Process

You can make the tax burden on your Social Security benefits simpler by paying these costs gradually throughout the year instead of all at once. You can either ask the Social Security Administration to withhold taxes from your benefit check by submitting a W-4V or pay quarterly estimates. If you are very concerned about tax burden in retirement, it’s a good idea to start saving early and generously with a Roth IRA, as this account uses after-tax dollars. You will never have to take required minimum distributions and you will not have to pay taxes on payments down the road because you already have.

Retirement can be tricky, so it’s important to stay on top of your finances and look for ways to improve your Social Security benefits. Check regularly to ensure you are saving enough for retirement in other ways like a 401(k) or IRA to supplement the money you can expect from Social Security. While paying taxes may not be enjoyable, this is an indication that you have saved sufficiently and will not have to live solely on these Social Security payments.

More from Credit.com:

MONEY ID Theft

IRS Will Now Provide Copies of Fraudulent Returns to Victims

copying machine
Sunil Menon—Getty Images

Now you can learn what scammers know.

The Internal Revenue Service will now provide identity theft victims with copies of fraudulent tax returns filed in their name.

The agency agreed to change its policy after New Hampshire Sen. Kelly Ayotte wrote to IRS Commissioner John Koskinen urging the agency to provide victims with copies of bogus returns filed in their names so that they could better understand the extent of the ID theft. The agency had previously refused to release the fraudulent returns for privacy reasons.

Instead, victims were notified only that their personal information had been used to file false returns. That left some taxpayers curious about the amount of personal and financial details scammers might know about them.

In his reply to Ayotte, Commissioner Koskinen wrote that the IRS “will put together a procedure that will enable victims to receive, upon request, redacted copies of fraudulent returns filed in their name and SSN.” (The returns will be redacted because a single tax return could contain multiple Social Security numbers, thus possibly compromising another person’s security.)

If your information was used to file a false return, follow our guide to getting your identity and refund money back.

 

 

 

 

MONEY identity theft

Here’s What To Do If Your Info Was Stolen from the IRS

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Thomas Northcut—Getty Images

Thieves stole 100,000 past tax returns from the IRS, says the agency.

Criminals using stolen personal data accessed old tax returns of 100,000 people through the Internal Revenue Service’s website, the agency announced Tuesday.

Using Social Security numbers, birth dates, addresses and other information acquired outside the IRS website, probably from data breaches at other insitutions, the criminals were able to clear a multi-step authentication process and request tax returns and other filings through the IRS’s “Get Transcript” application. The criminals then used the information obtained from those forms to file fraudulent tax returns, the IRS said.

Though the agency has now shut down the “Get Transcript” application, it sent nearly $50 million in refunds to the scammers before detecting the breach.

Later this week, the IRS will begin sending out notification letters to each of the 200,000 taxpayers whose accounts the scammers attempted to access. About 50% of those attempts—some 100,000—were successful, and the IRS will offer free credit monitoring to those taxpayers. Either way, if you are notified by the IRS, there is more you can do to protect yourself.

1. Check In with the IRS

The IRS said it will be “marking taxpayer accounts on our core processing system to flag for potential identity theft to protect taxpayers going forward.” But anyone notified by the IRS—whether your data was successfully stolen or not—should call the IRS Identity Protection Specialized Unit at 800-908-4490 to check that the agency has indeed placed an alert on your account and that the system reflects that your information (and return) has been compromised. You may also want to contact your state revenue agency to be certain a state tax return wasn’t fraudulently filed for you as well. (For your state’s hotline, check out this list.)

Also report the theft to local police and have it documented. While local law enforcement is unlikely to investigate, many government agencies and credit bureaus require an official theft report to help you solve the fall-out.

2. Add Another Layer of Security

If you are a victim of id theft, the IRS should issue you a personal identification number that will provide you with another level of security. You’ll need to submit this PIN along with your Social Security number when you file any tax form going forward so that the IRS knows to carefully check over your account. As an identity theft victim, you’ll get a new PIN every year. If you don’t receive it, request one because this extra step could save you from dealing with fraudulent returns year after year.

3. Alert the Credit Bureaus

“If a thief had enough information about you to file a false tax return, he could have also opened new credit card accounts or taken out a loan in your name,” says CPA Troy Lewis, chairman of the American Institute of CPAs’ tax executive committee.

Set up free fraud alerts with the three major credit reporting bureaus, Equifax, Experian, and TransUnion. These alerts, which last 90 days but can be renewed, warn potential creditors or lenders that you are an identity theft victim and that they must verify your identity before issuing credit.

You can go a step further by placing a credit freeze on your files, which instructs the credit agencies to prevent new creditors from viewing your credit score and report. With a police report, it’s free; without one, it can cost as much $10, depending on your state.

A freeze will keep you from accessing instant credit, too. So if you need to apply for a loan, for example, you’ll need to give the agency permission to thaw your data, and in some cases you’ll pay a fee to lift the freeze, which can take a few days.

MONEY advises against paying for credit monitoring services, since you can do the same work yourself for free and the steps above are a better preventative measure. But if the IRS offers it to for free, you may want to sign up for the service.

4. Check Your Credit Report

You are entitled to a free copy of your credit report from each of the three agencies. Check them carefully for unauthorized activity. Look at your history as well as recent activity. Just because you were first alerted to the problem through a false tax return does not mean that’s where the ID theft started.

If you see errors in your report, such as wrong personal information, accounts you didn’t open, or debts you didn’t incur, dispute those errors with each credit agency and the fraud department of the businesses reporting that inaccurate information.

5. Be Patient

The IRS says a typical case of ID theft can take 180 days to resolve. And even after you’ve cleared up this year’s tax mess, tax and credit fraud can be a recurring problem.

When a thief files a false return and beats you to filing, the IRS flags your legit return and processes it manually, meaning your refund could be delayed for months. The IRS will always pay you your refund, regardless of whether it already paid it out to a fraudster. If your tax fraud case hasn’t been resolved and you’re experiencing financial difficulties because of the holdup with your refund, contact the taxpayer advocate service at 877-777-4778.

MONEY Taxes

Thieves Stole $50M in Tax Refunds Using IRS’s Online Tool

The hackers apparently used already-stolen identity information to send phony requests through the IRS's website.

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