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Frequently Asked Tax Questions

Other (Alternative Minimum Tax, Estates, Trusts, Tax Shelters, State Tax Inquiries) - For Senior Taxpayer

  1. I exercised my rights to receive life insurance distributions before death. Are these proceeds taxable?
  2. I entered into a “reverse mortgage” arrangement with my bank, are proceeds of the loan taxable to me?
  3. I am over age 70 ½. How do I determine the amount I must withdraw each year from my IRA & 401(k) accounts to avoid penalty?

Rev. date: 1/25/2011

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

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 which were not repaid that were not included in your income.
You should receive a Form 1099-R showing the total proceeds and the taxable part. Report these amounts on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A.

Rev. date: 1/25/2011

I entered into a “reverse mortgage” arrangement with my bank, are proceeds of the loan taxable to me?

A reverse mortgage is a loan where the lender pays you (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. Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II.
See Publication 936 on Home Mortgage Interest Deduction.

Rev. date: 1/25/2011

I am over age 70 ½. How do I determine the amount I must withdraw each year from my IRA & 401(k) accounts to avoid penalty?

Generally, a required minimum distribution (RMD) is calculated for each account by dividing the prior December 31st balance of that IRA or retirement plan account by a life expectancy factor that IRS publishes in Tables in Publication 590, Individual Retirement Arrangements (IRAs). There are three separate tables:
The Uniform Lifetime Table is used by account owners whose spouse is not the sole beneficiary or whose spouse is not more than 10 years younger;
The Joint and Last Survivor Table is used by an account owner whose sole beneficiary of the account is his or her spouse and is more than 10 years younger than the account owner; and
The Single Life Expectancy Table is used by a beneficiary of an account.
You can use Worksheet 1-5, Figuring the Taxable Part of Your IRA Distribution, on page 41 of Publication 590.
For additional information see Publication 590 for RMD on IRA’s & Publication 575 for RMD on 401(k) plans.