“Accessing a large sum of cash from home equity and placing it in a bank account might be a problem for certain benefits that are “means-tested.”
– Understanding Reverse
Will getting a reverse mortgage impact my government benefits and/or my income taxes? These are major concerns that come up frequently when speaking to homeowners, especially during the month of April. And, for disclosure purposes, my first response is always:
“Keep in mind, reverse mortgage professionals are not a tax planners or financial planners, and rules regarding these items are always subject to change.”
Nevertheless, I offer general guidelines in my book, and in presentations to consumers, regarding both government benefits and taxation.
WILL A REVERSE MORTGAGE ADVERSELY AFFECT MY GOVERNMENT BENEFITS?
Maybe. As stated above, accessing a large sum of cash might pose a problem for some “means-tested” benefits. A means-test is a way of determining whether someone has the “means” to do without the assistance. Therefore, it will all depend on the answers to these two questions:
- Is the government benefit affected by means-testing?
- Is the amount drawn in excess of the benefit’s limits?
SOCIAL SECURITY AND MEDICARE
Basic Social Security benefits are not currently means-tested, and only a portion of Medicare is adjusted based on a homeowner’s income (MAGI or Modified Adjusted Gross Income). Therefore, we can safely say that Social Security and Medicare are NOT adversely affected by Reverse Mortgage proceeds.
SUPPLEMENTAL SECURITY AND MEDICAID
However, Supplemental Security (SSI) and Medicaid have income and/or asset requirements. It will be important to know what amount, held in a bank account, could prevent one from receiving those forms of assistance. As a result, it may be best to leave all available reverse mortgage funds in a line-of-credit, and only access those funds for specific expenses (e.g. roof repair, stair lift, bathroom remodel, etc.). Furthermore, it is always a best practice for the homeowner to consult with a benefits administrator financial advisor to make sure they are not disqualifying themselves.
CAN A REVERSE MORTGAGE IMPROVE MY GOVERNMENT BENEFITS?
Yes it can! Draws from Home Equity are not taxed as income. Therefore, showing a lower Adjusted Gross Income can reduce premiums surcharges for that portion of Medicare that is means-tested on income.
In addition, even small draws from a reverse mortgage may eliminate the need to file for Social Security benefits too early. Delaying social Security may have significant advantages until age 70, and even a one year delay can improve a homeowner’s retirement cash flow.
WILL A REVERSE MORTGAGE ADVERSELY AFFECT MY TAXES?
This is another major concern that comes up frequently when speaking to homeowners. Draws from home equity are not considered a taxable event (Federal or State Income Tax) and therefore do not adversely impact income tax liability.
However, if funds are drawn and placed into a bank account, they become an asset where interest may be earned. Any interest received from a new, or higher, bank account may be taxable moving forward.
On the flip side, when a homeowner draws part of their monthly cash needs from home equity instead of a taxable retirement income source, they may have the opportunity to reduce their marginal tax rate, which, in turn, can reduce their overall tax liability.
In addition, there may be cases where accrued interest, paid on a reverse mortgage loan balance, may be deductible just as with traditional, forward, mortgages. Keep in mind, reverse mortgages do not require monthly principal and interest payments. So, interest will generally accrue, but is not “paid”, and there can be no potential deductions unless a borrower actually makes prepayments.
To learn more about how reverse mortgages, and how they can be used in financial planning, subscribe to this blog in the right-hand margin and get a copy of the top-selling book on the topic – Understanding Reverse.