Reverse mortgage originators are not typically in a position to answer tax questions from their clients, but that doesn’t mean borrowers won’t have tax questions to ask, and it can help for originators to know where to point borrowers for the information they will need should those questions arise.
While the following information could be useful for reverse mortgage originators, clients should always be advised to talk with a Certified Public Accountant (CPA) or other certified tax professional before making any major decisions related to the filing of their taxes.
Reverse mortgages and income filing
Reverse mortgage loan officers don’t typically talk with their clients about the ways in which their loan will affect their filing of state and federal income taxes, according to Brandi Braley of Neighborhood Mortgage in Bellingham, Wash.
“I don’t talk taxes with my clients,” Braley says. “As far as the money people get out from a reverse mortgage, they would have to talk with their tax accountant. But, it’s not income they’re receiving from us, so when anything like that pops up, I do always recommend they talk to their accountant about that and see if the loan will impact them in any way.”
The Internal Revenue Service (IRS) does have a dedicated page for senior borrowers who may be curious about how their loan proceeds will affect their filing status, confirming that loan proceeds added are not taxable.
However, there are still some potential implications concerning how a reverse mortgage could impact a borrower’s tax filings, even if the loan proceeds themselves don’t count as a borrower’s income.
Interactions with benefit programs
Reverse mortgages typically do not have any bearing on eligibility for Medicare or Social Security income, but there can be implications with respect to other government programs, such as Medicaid.
Unspent balance from a reverse mortgage loan that is taken in a lump sum could put a borrower over the asset limits for Medicaid or Supplemental Security Income (SSI) eligibility, according to Elder Law Answers. “Even if the loan is taken as monthly payments, the payments could accumulate and push your resources over,” the site writes.
There can also be tax implications with respect to interest, since the interest that accrues on a reverse mortgage is taxable at the time it is paid.
Possible interest deductions
Typically, the interest is paid at the end of the loan, meaning any tax implications with respect to interest are likely to apply in the year when the interest is paid.
The IRS also goes into greater detail about reverse mortgage interest on its page, noting specific situations when interest may be deducted.
While some may be rushing to file their taxes before the April 15 deadline, moving at an expedited pace increases the likelihood of filing mistakes, the IRS says.
If someone finds themselves up against the clock concerning the filing of their taxes, the IRS recommends the use of electronic filing (“e-file”) or the filing of an extension to allow potential mistakes to be minimized.
“Mistakes can happen when hurrying to file a tax return by the due date,” the IRS says. “This can mean longer processing times and possible tax refund delays. Electronic filing is the best way to avoid common mistakes and file the most accurate tax return; it is also the most accurate way to file a tax return. The IRS estimates that about 70 percent of taxpayers can file their tax return at no charge by using IRS Free File software.”
For more detailed information, visit the IRS’ dedicated page for reverse mortgages. Originators who receive questions concerning how a reverse mortgage will impact a specific borrower’s tax filings should always advise them to consult with a CPA or other certified tax professional.