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Small Business Tax Strategies: March ’17

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Straight answer on reverse mortgages

Q. Are payments from a reverse mortgage taxable? D.J.P., Bangor, Pa.

A. No. A reverse mortgage is a way of tapping into the equity in your home. Instead of borrowing money from a bank to buy a home, the bank makes payments to you based on the home’s value. Because this is a loan that eventually must be repaid, there’s no tax due on the payments you receive. For some taxpayers who own their homes outright and need money for retirement, a reverse mortgage might be a viable alternative. But they often include relatively high fees. If you move out or die, the reverse mortgage comes due, and the home may have to be sold by your heirs to pay it off.

Tip: Use this technique with caution and investigate other funding methods.

Foreign intrigue for charitable gifts

Q. Can I deduct contributions made to a foreign charitable organization? M.C.R., Nashville, Tenn.

A. No. However, organizations with foreign addresses listed in the Exempt Organizations Select Check are generally not foreign organizations, but organizations formed in the U.S. that carry on activities in foreign countries are. These organizations are treated the same as any other domestic organization regarding the deductions of donations. Note that other annual deduction limits (e.g., limits on gifts of appreciated property) may come into play. Visit to see if an organization with a foreign address qualifies.  

Tip: Contributions to certain organizations with Canadian addresses may be deductible under a tax treaty.

Age restraints on RMDs

Q. I’m 70 and have four grandchildren who range from 3 to 10 years of age. Can I reduce my RMDs by naming them beneficiaries? K.B., Syosset, N.Y.

A. Yes, within limits. Generally, you must begin taking required minimum distributions (RMDs) after age 70½, based on the joint life expectancies of you and the other beneficiaries. So naming your grandchildren as beneficiaries (instead of older beneficiaries) will reduce your annual distributions, but maybe not as much as you think. Under the “incidental benefit rule,” the beneficiary is treated as being no more than 10 years younger than you. Thus, the 3-year-old, the youngest beneficiary, is treated like a 60-year-old.

Tip: You must take your first RMD by April 1, 2018.

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