Ask the Tax Editor, October 30: Questions on Reverse Mortgages, 529 Plans and More

Each week in our Ask the Tax Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she's looking at five tax questions from readers. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Reverse mortgages

Question: I am planning to take out a reverse mortgage on my primary home. Will I owe federal income tax on the money I receive in the transaction?

Joy Taylor: No. The payments you get from a reverse mortgage are treated as nontaxable loan proceeds. Note that you cannot deduct the interest that you eventually pay on Schedule A of Form 1040. That's because you are not using the reverse mortgage proceeds to buy, build or substantially improve the home that is securing the mortgage.

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2. 529 plans and college studies abroad

Question: I have a 529 plan for my son. He is currently in college in the U.S. and is planning to study abroad in the spring. I have been using 529 funds to pay for his college education. Can I use 529 funds to pay for his schooling abroad?

Joy Taylor: In your case, yes. A 529 plan can be used for any college that participates in the U.S. federal student aid program.

If a student is enrolled in a U.S. college and chooses to study abroad through the school's program for a semester or two, as your son appears to be doing, the study-abroad program will be 529-eligible, provided the U.S. college is eligible and the college accepts the study-abroad credits.

If a child decides to enroll in a non-U.S. college for his or her full college education, then that foreign university must participate in the U.S. federal student aid program. And believe it or not, many foreign colleges do participate and would therefore qualify as eligible schools for 529 purposes.

3. Pet insurance provided by an employer

Question: I have a dog, and my employer offers pet insurance as an employee benefit. Can I pay for pet insurance with pretax wages?

Joy Taylor: No. Unlike employer-paid health insurance for workers, which isn't included in an employee's taxable wages, the value of employer-paid pet insurance is taxable income to you. Most employers who offer pet insurance benefits don't subsidize the cost, however, and employees who opt in pay their share through post-tax payroll deductions.

4. Charitable donations

Question: My wife and I usually make large cash donations every year to charity and deduct the gifts on Schedule A of our 1040. Can we still deduct cash contributions up to 60% of our adjusted gross income, or did Congress change this rule?

Joy Taylor: Last year's "One Big Beautiful Bill" made permanent the rule that charitable cash contributions are deductible on Schedule A in a year only to the extent that total cash contributions don't exceed 60% of adjusted gross income (AGI). Excess contributions can be carried forward five years. The AGI limit for donations of capital gain property, such as stocks, bonds and shares in mutual funds, is generally 30%.

You should also be aware of the following new rule, starting with 2026 returns filed in 2027. Charitable deductions claimed by itemizers get a bit of a haircut. The Schedule A charitable write-off is deductible only to the extent that total charitable donations exceed 0.5% of AGI reported on your Form 1040. This is akin to the long-standing rule for deducting medical expenses on Schedule A, in which total medical costs are deductible only to the extent they exceed 7.5% of AGI.

5. How long to keep tax records

Question: How long should I keep supporting tax records, such as Forms 1099 and monthly brokerage records?

Joy Taylor: Generally, we suggest keeping tax returns, 1099 forms and other third-party information returns for at least three years from the due date of your return. But don’t automatically throw out all of your tax returns and records after three years. Look over old documents to see if you might need any parts of them in the future. And there are some records you can toss earlier than three years. How long you keep monthly brokerage statements depends on various factors.

Read more: How Long to Keep Tax Returns and Records and How Long Should You Keep Tax Records?

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill, retirement accounts and more. We will continue to answer these in future Ask the Editor roundups. So keep those questions coming!

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