Learn About the Mortgage Insurance Premium Tax Deduction
This deduction was renewed through 2017 and might yet be renewed again
Mortgage insurance premiums can increase your monthly budget significantly—an additional $83 a month or so at a .5 percent rate on a $200,000 mortgage as of 2018. But these premiums were tax deductible through 2017, and there's still hope for the 2018 tax year as well.
The Legislative Roller Coaster
The first introduced the mortgage insurance deduction back in 2006. Congress extended the deduction in 2015 when it passed the (PATH) Act, but the deduction expired on December 31, 2016. The extension was good for only one year.
Then Congress stepped in again. The retroactively extended the . This is one of those tax deductions that tends to be resuscitated annually. On January 8, 2019, California Representative Julia Brownley introduced the Mortgage Insurance Tax Deduction Act of 2019, which would permanently enshrine the deduction in the tax code and would apply to all amounts paid or accrued since December 31, 2017.
Lenders typically require private mortgage insurance to secure the debts in the event of default. It's charged to buyers who are unable to or don't want to make down payments of at least 20 percent on property. The insurance policy can be issued by a private insurance company or by the Federal Housing Administration or the 's Rural Housing Administration. The has a funding fee instead of monthly mortgage insurance.
Loans That Qualify
The mortgage insurance premium deduction applies only to loans taken out on or after January 1, 2007. The insurance policy must be for . A home acquisition debt is one whose proceeds are used to buy, build, or substantially improve a residence.
You typically can't rent the second home out—you must use it personally, such as a vacation home. You might still qualify a deduction, however, if you treat the second home as an income-producing business asset. Home equity loans don't qualify for the deduction, nor do cash-out refinances. However, refinance loans up to the amount of the original mortgage are covered, however.
Taxpayers who can claim this deduction are middle-income families because it phases out and becomes unavailable at higher income levels.
If you're single, filing as head of household, or married and filing jointly, the deduction begins phasing out by 10 percent for each $1,000 by which your adjusted gross income (AGI) exceeds $100,000. In effect, this means that you're not eligible to claim the deduction if your adjusted gross income exceeds $109,000. If you're married and filing separately, the phase out begins at $50,000 and increases for each $500 by which you exceed this limit, effectively meaning you aren't eligible if your AGI exceeds $54,500.
The IRS is issuing a new Form 1040 for the
Claiming the Deduction
Mortgage insurance premiums paid during the year are . You should receive this form from your lender after the close of the tax year. You can find the amount you paid in premiums in box 4. There’s currently no limit on the amount of the deduction you can claim if you and your loan qualify. You can deduct this entire amount.
Mortgage insurance premiums are itemized tax deductions. They're reported on line 13 of Schedule A, "Interest You Paid." You can’t claim the mortgage insurance premiums deduction if you claim the standard deduction—you must itemize using Schedule A.
And if you missed the boat in 2017 and neglected to claim this deduction although you could have? All isn't lost. You can typically amend your tax return with the IRS for up to three years after you file the original return or two years after you've paid any tax due on that return, whichever is later.
Canceling Your Insurance
It can pay to check your current mortgage balance against your home's fair market value even if it turns out that you can claim a tax deduction for PMI again in 2018. You no longer have to pay private mortgage insurance when your , but it's unlikely that either your lender or the insurer will point this out to you.
No one is going to voluntarily cancel your policy for you when you hit this magic number—but you can. Be prepared to have your home appraised or a value otherwise assigned by a professional so you can prove the insurance is no longer required.
Even if it turns out that Congress does not renew the credit again for 2018, you might be able to save some money regardless by taking steps to cancel your policy.
NOTE: Tax laws change periodically, and you should consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and is not a substitute for tax advice.