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.

MONEY Taxes

5 Things to Know If You Still Haven’t Finished Last Year’s Taxes

Practicing golf in office
You can't put off finishing your taxes for much longer. Jan Stromme—Getty Images

Attention tax procrastinators: Time’s nearly up if you filed for an extension last spring.

Remember the relief you felt last April when—faced with a looming tax-filing deadline—you simply applied for an automatic six-month extension for your 2013 return? The dread is back. October 15, next Wednesday, is the filing deadline for everyone who took advantage of the government’s grace period. As of the end of September, more than a quarter of the nearly 13 million taxpayers who had filed for an extension had yet to file, according to the IRS. If you’re one of those procrastinators, here’s what you need to know.

1. This time the deadline is real. No more extensions (one exception: members of the military serving in a combat zone). If you don’t file and pay your tax bill, you’ll get a failure-to-file notice. And you’ll start the clock on a failure-to-file penalty (5% of your unpaid taxes per month, up to a max of 25%), a failure-to-pay penalty (0.5% of your tax bill per month, up to a max of 25%), and interest (currently 3%).

“You could have three things adding up month by month if you do nothing by October 15,” says Mark Luscombe, principal federal tax analyst for Wolters Kluwer, CCH. Of course, if you’re expecting a refund, there’s no penalty for not filing—and also no refund until you do.

2. Do nothing, and the IRS will eventually file for you. And you may not like the results. That’s because the IRS will base your tax bill on the information it has, such as the income reported on your W-2, notes White Plains, N.Y., CPA Paul Herman. But they won’t know other things that could lower your tax bill, like all the deductions you’re entitled to or what you paid for stocks, bonds, or mutual funds you sold last year.

3. If you can’t pay your entire bill, throw out a number. File your return for sure—that at least saves you the failure-to-file penalty. When you do, request an installment agreement (Form 9465), and propose how much you can pay a month, or the IRS will divide your balance by 72 months. If the offer is reasonable, says Herman, the IRS may accept it.

4. Free help hasn’t gone away. Through October 15, you can still use the IRS’s Free File program, which makes brand-name tax-filing software available at no cost if your income is $58,000 or less. Earn more than that, and you can still use the free fillable forms at the IRS website.

5. You have one less way to cut your taxes. You’re out of luck if you had hoped to trim your tax bill by funding an individual retirement account for 2013 (depending on your income, as much as $5,500 was deductible last year, $6,500 if you’re 50 or older). Even though you got an extension to file, the deadline for opening an IRA for 2013 was last April 15. (Make a note: You have six months to open a 2014 IRA).

However, if you switched a traditional IRA into a Roth IRA last year—which meant a tax bill on your conversion—you still have until October 15 to change your mind. That’s something you might do if the value of your Roth has since dropped. You can “recharacterize” the conversion (in effect, switch back to a regular IRA) and then convert to a Roth again later, this time realizing a smaller taxable gain and owing less in taxes.

Finally, if you find yourself doing your taxes every fall, think about changing your ways. Maybe invest in a better system for organizing your records? “If you waited this long,” says Herman, “try to begin planning earlier for next year.”

MONEY Ask the Expert

What Happens If You Get Your Obamacare Subsidy Wrong

140603_FF_QA_Obamacare_illo_1
Robert A. Di Ieso, Jr.

Q. What happens to someone who has overestimated his income and received the wrong subsidy amount for a marketplace plan? Does he get a tax refund when he files? What if he underestimated his income and was paid too much? Does the system catch it when he reapplies for coverage in 2015? Will he be prevented from renewing automatically?

A. If you received too small a subsidy because you overestimated your income, that amount will be added to your tax refund—if you’re receiving one—or it will reduce the amount of tax that you owe, says Timothy Jost, a law professor at Washington and Lee University and an expert on the health law.

Similarly, if your subsidy was too large because you underestimated your income, you may have to pay some or all of it back. If your income is more than 400% of the federal poverty level ($94,200 for a family of four that enrolled for 2014), you’ll owe the full amount of any subsidy overpayment. At lower incomes, the amount that must be repaid is capped.

How your 2015 subsidy will be handled when you renew your coverage this fall will vary. If you live in one of the states where the federal government runs the health insurance marketplace, you may be automatically enrolled in a 2015 plan and, unless you contact the marketplace to update your income and other details, your subsidy amount will remain the same next year. That’s probably not in your best interest, since changing marketplace policy details and changes in your own financial situation could mean you either may not receive the total amount you’re due or you’ll be on the hook to repay a too-generous subsidy. The system, however, won’t prevent someone from renewing next year, automatically or otherwise, because his subsidy amount was incorrect.

“The best thing to do is to get in touch with the exchange to make sure they have the most up-to-date information,” says Jost.

States that operate their own marketplaces may handle enrollment differently. Those states may, for example, require everyone pick a new plan and update their subsidy eligibility information instead of simply auto-enrolling them, says Judith Solomon, a vice president for tax policy at the Center on Budget and Policy Priorities.

Kaiser Health News is an editorially independent program of the Henry J. Kaiser Family Foundation, a nonprofit, nonpartisan health policy research and communication organization not affiliated with Kaiser Permanente.

MONEY Taxes

Don’t Fall for the ‘Steve Martin’ IRS Phone Call Scam

Caller ID showing phone scam
Rod Crow—Alamy

Callers claiming to be government agents with names like "Steve Martin" and "Jack Dawson" say that you owe unpaid taxes, and you'll be arrested asap if you don't pay up. It's a big scam—apparently, one that's spreading.

A phone scam that first appeared nationally a year ago and has ripped off victims for more than $5 million is showing no signs of slowing down. In October 2013, the IRS issued a warning concerning a “pervasive telephone scam” that had popped in nearly every state in the country—victimizing recent immigrants in particular—that played out in the following way:

Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.

The Treasury Inspector General for the Taxpayer Administration (TIGTA) and the FTC followed up with warnings about the scam during tax season, by which time more than 20,000 suspect calls had been reported, and victims had been bilked of more than $1 million. Based on how lucrative this con has been for fraudsters, it’s no wonder that the calls keep on coming. By August, the IRS was compelled to send out another warning, alerting the public that the number of complaints about such calls had surpassed 90,000, and losses by victims had exceeded $5 million.

In recent weeks, amid continued reports in Ohio, Delaware, New Jersey, and other states, the FBI issued an alert with more details about the “intimidation tactics” used by callers. There may be threats to “confiscate the recipient’s property, freeze bank accounts, and have the recipient arrested and placed in jail. The reported alleged charges include defrauding the government, money owed for back taxes, law suits pending against the recipient, and nonpayment of taxes. The recipients are advised that it will cost thousands of dollars in fees/court costs to resolve this matter.”

It has been widely mentioned on scam warning Internet forums that the voices on the end of the threatening phone calls often have thick accents—variously described as Indian, Middle Eastern, or Asian—and that they identify themselves as IRS agents with names that are sometimes generic American (Julie Smith, John Parker, Barry Foster) and other times seem pulled directly from Hollywood movies. “Steve Martin,” the original “Wild and Crazy Guy,” is one of the favorite fake names used by the scammers. “Jack Dawson,” the name of Leonardo DiCaprio’s iconic character in “Titanic,” is another. At times, the callers have been known to become abusive and use foul language, telling the call recipients, “Don’t be stupid” and “your ass will wind up in jail.”

All of these “problems” can go away, the scammers say, if the victim makes a payment of $500 or $1,500 immediately—ideally in an entirely untraceable way, such as a prepaid money card or wire transfer.

Before rolling your eyes and thinking you’d never fall for such a scam, note that the con involves a caller ID trick that makes it look like the call is originating from a number that is indeed used by an IRS office. Yet as the FTC warned, “You can’t rely on caller ID. Scammers know how to rig it to show you the wrong information (aka “spoofing”).” What’s more, callers often have some of the victim’s personal information handy, such as the last four digits of a social security number. Further calls and bogus “IRS” emails may follow the original call, in order to the make the demand for payment seem more legitimate.

Rest assured, it’s not. If you’re at all uncertain if you’re dealing with a scammer, bear in mind the following:

• The IRS almost always contacts people about unpaid taxes first by mail, not by phone.

• The IRS never asks for immediate payment over the phone, never requests payment information (for example, a debit card number) over the phone, and never specifies a certain form of payment for unpaid taxes.

• It is not standard procedure for IRS agents to call after normal office hours are over, nor to threaten people that more calls will follow if you don’t comply immediately, nor to swear at taxpayers.

If you do get a call that you suspect to be a scam, do NOT give out or confirm any personal information, and most certainly do NOT wire money or make payment of any sort. Hang up the phone right away, and then report the incident at the TIGTA hotline (800-366-4484). File a complaint with the FTC as well.

MONEY Ask the Expert

How to Live Well on Less by Retiring Overseas

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q: I hear a lot about people retiring overseas to make their retirement savings go further. My wife and I are pretty adventurous. But can we really save money retiring in another country?

A: Retiring abroad isn’t for everyone—but more and more people are doing it. Nearly 550,000 Americans receive their Social Security benefits abroad, up from nearly 400,000 in 2000, according to the Social Security Administration. That’s a small number compared to the 43 million people over 65 receiving Social Security benefits. Still, 3.3 million of America’s 78 million Baby Boomers say they are interested in retiring abroad, according to Travel Market Report.

The growing interest in overseas living isn’t all that surprising, considering the worries of many pre-retirees about making their money last. There’s no question that you can live well on less in many countries. But to make that happen, you’ll need to plan carefully, says Dan Prescher, an editor at International Living, which publishes guides on the best places to retire overseas.

For most Americans, the biggest savings are a result of the lower prices for health care and housing overseas, says Prescher, who lives in Ecuador with his wife Suzan Haskins. The couple co-authored a book. The International Living Guide To Retiring Overseas On A Budget.

Most countries have a national healthcare system that cover all residents, and monthly premiums are often less than $100. It’s relatively easy to become a resident of another country, which typically involve proving you’ll have at least a modest amount of income, perhaps $1,000 a month.

But quality of health services varies, so research carefully, especially if you have medical problems. Even in countries with well-rated health care systems, the best services are centered around metropolitan areas. “Larger cities have more hospitals and doctors. The farther out you go, the quicker the quality falls off,” says Prescher.

Though Medicare doesn’t cover you if you live abroad, it’s still an option, and one that you should probably keep open. If you sign up—you’re eligible at age 65—and keep paying your premiums, you can use Medicare when you are back in the U.S.

Home prices, property taxes and utilities can be significantly lower in Mexico and countries in Central and South America, which are popular with U.S. retirees. In Mexico, you can find a nice three-bedroom villa near the beach for as little as $150,000, says Prescher.

But you’ll pay a premium for many other needs. Gas and utilities can cost a lot more than in the U.S. And you will also pay far more for anything that needs to be imported, such as computers and electronics or American food and clothing. “A can of Campbell soup can easily cost $4.50,” says Prescher. “You have to ruthlessly profile yourself, and see what you can or can’t live without, when you are figuring out your spending in retirement.”

Then there are taxes. As long as you’re a U.S. citizen, you have to pay income taxes to the IRS, no matter where you live or where your assets are located. Even if you don’t owe taxes, you must file a return. If you have financial accounts with more than $10,000 in a foreign bank, you must file forms on those holdings. In addition, the new Foreign Accounts and Tax Compliance Act (FATCA), which requires foreign banks to file U.S. paperwork for ex-pat accounts, has made many of them wary of working with Americans. You may also need to pay taxes in the country where you reside if you own assets there.

Check out safety issues too. Use the State Department’s Retirement Abroad advisory for information for country-specific reports on crimes, infrastructure problems and even scams that target Americans abroad.

The best way to find out if retiring abroad is for you is to spend as much time in your favorite city or village before you commit. Go during the off-season, when it may be rainy or super hot. See how difficult it is to get the things you want and what’s available at the grocery store. Read the local papers and check out online resources. In addition to International Living’s annual Best Places to Retire Overseas rankings, AARP writes about retiring abroad and Expatinfodesk.com publishes relocation guides.

The most valuable information will come from talking to other ex-pats when you’re visiting the country, as well a through message boards and online communities. “You’ll find that ex-pats have to have a sense of adventure and patience to understand that things are done differently,” says Prescher. “For many people, it’s a retirement dream come true.”

TIME

Sometimes the Government Puts Money in Our Pockets

Cash Money Dollar Bills
Getty Images

The percentage of women who get free birth control has skyrocketed since Obamacare went into effect, providing new ammunition for the political wars over Obamacare as well as the cultural wars over birth control. But there’s been almost no attention paid to the practical effect of this trend: It’s the equivalent of a modest tax cut for millions of women whose insurers used to require co-payments. It’s putting money in ordinary people’s pockets.

These days, the big economic story is about inequality, about a recovery that’s benefited the rich more than the poor, about middle-class wages that haven’t increased in fifteen years. It’s an important story. But the storytellers often overlook a variety of public policies that have helped offset the structural trends widening the gap between the rich and the rest. “Instead of promoting equality,” Tom Edsall wrote in a recent New York Times jeremiad, “public policy has…bestow[ed] the benefits of growth on the very few.” In fact, the government has put money into ordinary people’s pockets in all kinds of ways.

The most obvious way has been tax cuts. President Obama’s 2009 stimulus bill—a topic I’ve discussed at some length—included $300 billion in tax cuts, mostly for the non-rich. The centerpiece was called Making Work Pay, which provided up to $800 a year for the bottom 95% of working families, and was later converted into a payroll tax credit worth up to $2,136 a year before it expired in 2012. Most stimulus tax cuts were “refundable,” which meant low-income workers who don’t pay income taxes—the “47 percent” that Mitt Romney was caught denigrating on video—would be eligible to benefit. When Obama famously told former House Majority Leader Eric Cantor “elections have consequences, Eric, and I won,” he was talking about refundable tax cuts for the poor, which House Republicans opposed but could not block.

This extra money for the poor and middle class doesn’t show up in charts illustrating how the rich are vacuuming up all the recovery’s income and wealth. Those charts and the pundits who love them also tend to ignore the impact of Obama’s tax hikes on the rich, especially his repeal of the Bush tax cuts on income over $400,000. In his Times essay, titled “America Out of Whack,” Edsall speculates at length about the impossibility of redistributive taxation in modern Washington, somehow failing to mention that it just happened in a big way last year. As Zachary Goldfarb calculated for a Washington Post piece on inequality in July, repeal cost the average member of the top 0.1% income bracket nearly half a million dollars.

Obamacare is also financed by hefty new taxes on the rich, including a 3.8% hike on investment income and a 0.9% hike on earned income above $250,000. But its main push against inequality will be its health benefits for the uninsured and underinsured. Free birth control is just one example. There’s also free primary care and other preventive services. Families up to 138% of the poverty line are now eligible for Medicaid benefits in participating states. The law also eliminated the “donut hole,” reducing drug costs for seniors. None of this will show up in the inequality data, but it all helps make ordinary Americans less financially insecure. And so far, Obamacare insurance premiums have been significantly lower than expected, which means more money in ratepayer pockets. Jason Furman, chair of the Council of Economic Advisers, says the combination of Obamacare plus progressive tax changes has offset a decade’s worth of rising inequality.

There are many less memorable ways that public policy has tried to narrow the gap. For example, the stimulus, if you’ll pardon my obsession, also sent $250 checks to retirees and disabled veterans, increased Pell Grants for low-income students by more than $600, and expanded unemployment benefits by $25 a week. Oh, and the stimulus—along with the much-maligned Wall Street bailouts and the Federal Reserve’s aggressive monetary policies—helped prevent a depression, a very good thing for the poor and middle class as well as the wealthy and the Dow. The 10 million new jobs created in this recovery didn’t all go to rich people.

The stimulus also financed energy-efficiency retrofits of more than 1 million low-income homes, which will save families money and power for decades to come. And beyond the stimulus, the Department of Energy estimates that the Obama administration’s new energy-efficiency mandates for refrigerators, air conditioners and dozens of other appliances will save consumers $450 billion on their electric bills through 2030. The administration’s strict fuel-efficiency standards for cars and light trucks are expected save drivers another $500 billion. That’s real money.

Even the federal response to the foreclosure crisis, widely perceived as an abysmal failure, has provided financial help to millions of Americans in need. The most important move, widely perceived as a gift to undeserving corporations, was the $400 billion government bailout of Fannie Mae and Freddie Mac, which kept mortgage credit flowing at a time when no one else would provide it, averted a dramatic increase in mortgage rates, and helped 26 million homeowners reduce their monthly payments by refinancing their mortgages by 2014. Federal programs like HARP (which helped 3 million of those homeowners refinance) and HAMP (which helped modify another 1.3 million loans) were slow and often inefficient, but low mortgage rates—maintained by the Federal Reserve’s aggressive purchases of mortgage-backed securities as well as the government backstop for Fannie and Freddie—meant money in the bank for anyone with an adjustable-rate mortgage.

Reasonable people can disagree about whether government should be in the business of redistribution—what Obama called “spreading the wealth” in his 2008 chat with Joe the Plumber—but we should recognize that it is. The inequality trends, as severe as they are, would be far more severe without government intervention. Yes, the average CEO earns almost as much in a day as the average worker earns in a year, but government—through progressive taxation, the safety net, public education and other public services, and the policies of the last five years—has been pushing back.

Is it pushing back hard enough? Well, reasonable people can disagree about that, too.

 

MONEY inversion

Everything You Need to Know About Companies Leaving America for Taxes

U.S. Treasury Secretary Jacob Lew speaks in the Cash Room of the Treasury Department in Washington D.C.
U.S. Treasury Secretary Jacob Lew Bao Dandan—Xinhua Press/Corbis

The Obama administration is trying to stop corporate "inversions." A closer look at how they work, and what the Treasury is doing about them.

In the midst of a wave of U.S. companies including Burger King, Medtronic and AbbVie moving to foreign locales, the Treasury Department announced Monday new rules to make it harder for a corporation to save on taxes by changing its home address. For many Americans, the idea that a company can reduce what it owe to Uncle Sam just by leaving is frustrating, but also, frankly, a bit baffling. Here are some answers:

People keep saying that companies that move abroad for taxes are doing an ” inversion.” What’s inverted about it?

The way most of these deals work is that a big American company buys a smaller foreign one. But then the org chart flips over: The little foreign company’s headquarters become, at least on paper, the HQ of the new global company. The large American company is now a foreign one, and taxed according to that country’s rules.

What does that change about how the company is run? Does it mean American jobs are going overseas?

A tax inversion doesn’t have to change much at all about how the company is run, or where anybody works. It’s really just a change of official address.

Tellingly, the U.S.-based pharma company AbbVie ABBVIE INC. ABBV 0.8885% , which is acquiring Shire as part of an inversion move, is moving its HQ to the island of Jersey. The British Crown dependency is not really a hub for… well, much of anything. Besides really attractive tax laws.

Wait, it can’t possibly be that easy–you mean you just buy a foreign company and now you don’t have to pay U.S. taxes?

You’re right, it’s not that simple. This move only changes the taxes U.S. companies owe on their foreign profits.

The United States has what’s known “worldwide” taxation, meaning that corporations owe income taxes on profits wherever they earn them. Many other countries only tax income earned in that country. As explained here by economist Kimberly Clausing in a paper for the Tax Policy Center, companies get a credit on their U.S. taxes to offset taxes paid abroad, so that they aren’t liable twice on the same income. Still, U.S. corporate rates, which go up to 35%, are often higher than what’s owed to other governments. So by inverting, the company can pay less tax on its foreign income.

But the company still owes taxes on whatever profits it earns in the U.S. So, for example, when Burger King BURGER KING WORLDWIDE INC BKW 3.5815% acquired Canadian doughnut chain Tim Hortons and moved its HQ north, it didn’t automatically get out of paying American taxes on Whoppers sold in Dayton and Miami and L.A. It did, however, ensure it won’t owe the IRS anything on doughnut profits in Ontario and Quebec. And if the company expands to new countries, moving its address out of the U.S. will have given it even more tax savings.

If inverted companies are still paying U.S. taxes on the business they do here, is this really such a problem?

Ah, but wait, there’s more. Enter the very clever accountants. There may be ways for a multinational company to shift its income around to lower its taxes on U.S. profits. As Stephen Shay of Harvard Law has explained, an inverted company, now that it’s foreign, can make a loan to its U.S. unit. That moves money from the U.S. business to the foreign parent, while the interest payments reduce its taxable U.S. income.

The move can also help a company get out of paying taxes it otherwise would have owed on past profits. Companies generally don’t have to pay taxes on foreign earnings until they bring them back to the U.S., for example to pay to shareholders in the form of dividends or stock buybacks. As a result, many global companies have built up billions in assets abroad. But after an inversion, notes Clausing, the new company can use loans between foreign affiliates in a game of “hopscotch” that effectively allows the new, foreign parent company to get its hands on the money without creating a U.S. tax liability.

Bottom line: Though inversions probably don’t cost American jobs, they do reduce tax revenues.

What does the White House want to do about it?

As Fortune reports, Treasury Secretary Jacob Lew says new Treasury regulations will make inversions less attractive for companies. First, it will crackdown on the “hopscotch” move, making it harder for a company to avoid taxes when turning money from foreign subsidiaries into cash that can go shareholders. It will also strengthen an existing “80% rule,” which says the American company’s value must be less than 80% of that of the new, combined company. (In other words, a company can’t invert by buying just any tiny little foreign firm–it has to find a merger partner that would make up 20% of the combined corporation.) Companies were getting around that rule, the Treasury says, with accounting moves to deflate the value of the U.S. company or inflate the size of the foreign one.

Shouldn’t, um, Congress be handling this?

Everybody on the Hill says inversions are just a symptom of a messed up tax code. The trouble is Republicans and Democrats are sharply divided on how to fix it. The GOP wants to move away from the worldwide tax system to a “territorial” one, so taxes are owed based on where they are earned. This would end inversion by making it unnecessary–a company’s foreign earnings would be free from U.S. taxes no matter where they kept their headquarters. Democrats have generally opposed this, preferring to impose new rules making it harder to use foreign subsidiaries as tax havens. Lawmakers in both parties have proposed cutting the top corporate rate.

MONEY Taxes

How Identity Thieves Stole $5.2 Billion from the IRS

Invisible Man at computer
Getty Images

And how to make sure you won't be their next target.

More than $5 billion, with a B: that’s how much the IRS estimates it mistakenly paid to identity thieves last year, according to a new study from the Government Accountability Office. The thieves filed fraudulent tax returns on behalf of unsuspecting citizens, and the IRS didn’t catch the fraud until after long after the refund checks had been sent. The only good news? It could have been a lot more money. The IRS estimates it identified and stopped another $24.2 billion in attempted fraud — but the agency acknowledges it’s hard to calculate the full extent of the problem.

Here’s how thieves get away with it: You usually receive a W-2 from your employer by the end of January, then file your tax return by April 15. During that time, thieves steal your identifying information, file fake returns on your behalf, and collect the refund check. It all happens pretty quickly, since the IRS tries to issue your refund within three weeks of receiving your return.

Employers have until March to send their W-2s to the Social Security Administration, which later forwards the documents to the IRS. The IRS doesn’t begin checking tax returns against employers’ W-2s until July. The GAO has found that it can take a year or longer for the IRS to complete the checks and catch the theft.

The easiest way you can deter this kind of fraud? File early, and file electronically. Once the IRS receives a return with your social security number, the agency will reject any duplicate filings and notify you right away. The IRS is also piloting an initiative to issue single-use identity protection PIN numbers to taxpayers who have verified their identities.

Still, the danger could be growing: As recently as 2010, tax- and wage-related identity theft made up just 16% of all ID-theft complaints at the Federal Trade Commission. Last year that portion rose to 43%. Below are four more common ways ID thieves can strike — and what you can do to protect yourself.

1) Purloined paper.

Have tax documents sent to a P.O. box or delivered electronically so they can’t go missing. Shred extra copies. “Your tax return needs to be treated as an item of extreme privacy,” says Staten Island CPA John Vento.

2) Unsecure networks.

Never file electronically over public Wi-Fi or a network that’s not password-protected. Make sure you have up-to-date antivirus software and a firewall on your home computer.

3) Dodgy emails.

Be leery of any email claiming to be an IRS notice of an outstanding refund or a pending investigation; the IRS will never email you to request sensitive information. Forward suspect messages to phishing@irs.gov. Other electronic traps: fake websites similar to irs.gov, and tweets purporting to be from the IRS (@IRSnews is the verified handle).

4) Phone fakes.

In October of last year, the IRS warned of a sophisticated phone scam in which callers already knew the last four digits of your Social Security number and mimicked the IRS toll-free number on your caller ID. If the IRS calls you out of the blue, hang up and call back (800-829-1040).

This advice was excerpted from MONEY’s 2014 Tax Guide.

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Alaska Gives Every Resident $1,900 Cash… Just for Being an Alaskan

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MONEY Ask the Expert

The Right Way to Tap Your IRA in Retirement

Q: When I do my IRA required minimum distribution I take some extra money out and move it to a taxable account. Good idea or bad idea? Thanks – Bill Faye, Rockville, MD

A: After years of accumulating money for retirement, figuring out what to do with “extra” money withdrawn from your IRA accounts seems like a nice problem to have. But required minimum distributions, or RMDs, can be tricky.

First, a bit of background on managing RMDs. These withdrawals are a requirement under IRS rules, since Uncle Sam wants to collect the taxes you’ve deferred on contributions to your IRAs or 401(k)s. You must take your distribution by April 1st of the year you turn 70 ½; subsequent RMDs are due by December 31st each year. If you don’t take the distribution, you’ll pay a 50% tax penalty in addition to regular income tax on the amount that should have been withdrawn.

The size of your required withdrawal depends on your age and the account balance. (You can find the details on the IRS website here.) If you’re over 59 ½, you can take out higher amounts than the minimum required, but the excess withdrawals don’t count toward your future distributions. Still, by managing your IRAs the right way, you can preserve more of your portfolio and possibly reduce taxes, says Mary Pucciarelli, a financial advisor with MetLife Premier Client Group.

For those fortunate enough to hold more than one IRA, you must calculate the withdrawal amount based on all your accounts. But you can take the money out of any combination of the IRAs you hold. This flexibility means you can make strategic withdrawals. Say you have an IRA with a big exposure to stocks and the market is down. In that scenario, you might want to pull money from another account that isn’t so stock heavy, so you’re not selling investments at a low point.

You can minimize RMDs by converting one or more of your traditional IRAs to a Roth IRA. Roths don’t have minimum distribution requirements, so you can choose when and how much money you take out. More importantly, you don’t pay taxes on the withdrawals and neither will your heirs if you leave it to them. You will owe taxes on the amount you convert. To get the full benefit of the conversion, consider this move only if you can pay that bill with money outside your IRA. Many investors choose to make the move after they’ve retired and their tax bill is lower. Pucciarelli suggests doing the conversion over time so you can avoid a big tax bill in one year.

Up until this year, you could avoid paying taxes on your RMD by making a qualified charitable contribution directly from your IRA to a charity. The tax provision expired in December. It’s possible Congress will renew the tax break, though nothing is certain in Washington. Meanwhile, if you itemize on your taxes, you can deduct your charitable contribution.

As for the extra money you’ve withdrawn, it’s fine to stash it in a taxable account. If you have sufficient cash on hand for living expenses, you can opt for longer-term investments, such as bond or stock funds. But be sure your investments suit your financial goals. “You don’t want to throw your asset allocation out of whack when you move the money,” says Pucciarelli. Consider a tax-efficient option, such as an index stock fund or muni bond fund. That way, Uncle Sam won’t take another big tax bite out of your returns.

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

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