Are the proceeds I receive from a reverse mortgage taxable to me?

Answer:

No, reverse mortgage payments aren't taxable. Reverse mortgage payments are considered loan proceeds and not income. The lender pays you, the borrower, loan proceeds (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home.

  • With a reverse mortgage, you retain title to your home.
  • Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die.
  • Interest (including original issue discount) accrued on a reverse mortgage isn't deductible until you actually pay it (usually when you pay off the loan in full). Also, a deduction of interest may be limited because a reverse mortgage generally is subject to the limit on home equity debt, which is not deductible unless the proceeds are used to buy, build, or substantially improve the home that secures the loan. For information on deducting mortgage interest and the debt limit that applies, see Publication 936, Home Mortgage Interest Deduction.

 

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I exercised my rights to receive life insurance distributions before death. Are these proceeds taxable?

Answer:

If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. In general, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy less any refunded premiums, rebates, dividends, or loans that you neither repaid nor previously included in your income. You should receive a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. showing the gross proceeds and the taxable part. Report these amounts on lines 4a and 4b of Form 1040, U.S. Individual Income Tax Return.

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I am over age 70½. How do I determine the amount I must withdraw each year from my IRA & 401(k) accounts to avoid a penalty?

Answer:

Generally, the required minimum distribution (RMD) must be figured separately for each account. You can calculate the RMD for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes in tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). Use the:

  • Uniform Lifetime Table (Table III) if you're an unmarried owner, an owner whose spouse isn't the sole beneficiary, or an owner whose spouse isn't more than 10 years younger;
  • Joint and Last Survivor Table (Table II) if you're a married owner whose spouse is both more than 10 years younger and the sole beneficiary of the account; and
  • Single Life Expectancy Table (Table I) if you're a beneficiary of an account.

You can use Worksheet 1-1. Figuring the Taxable Part of Your IRA Distribution, in Publication 590-B.

Note: If you have more than one IRA, you can total the required distributions for all the IRA accounts and then satisfy the requirement by taking distributions from any one (or more) of the IRA accounts.

For more information, see Publication 590-B for RMDs from IRAs and Publication 575, Pension and Annuity Income for RMDs from employer-sponsored retirement plans, such as 401(k) plans.

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