Mortgage insurance payments might drastically boost your monthly budget. As of the end of 2016, they were averaging between $100 and $200 per month. But sometimes they’re tax deductible—at least through the end of that tax year.
The Protecting Americans from Tax Hikes Act
In 2006, the Tax Relief and Health Care Act established the mortgage insurance deduction for the first time. The Protecting Americans from Tax Hikes (PATH) Act, passed by Congress in 2015, extended it. The deduction, however, was set to expire on December 31, 2016 under the rules of the PATH Act. Only a year was left on the extension.
Because Congress has the power to reauthorize the deduction, it may not be gone forever. This is one of the annual deductions that the government examines, and it might be addressed in President Trump’s tax reform measure, which he claims is intended at assisting middle-income households.
Because this deduction fades out and becomes unavailable at higher income levels, it is only available to middle-income families. Mortgage interest and real estate tax deductions are both protected in 2017. The mortgage insurance deduction is the only one that is still up in the air.
Private mortgage insurance is often required by lenders to secure obligations in the case of failure. It is imposed on buyers who are unable to put down a 20% down payment. A private insurance business, the Federal Housing Administration, the Department of Agriculture’s Rural Housing Service, or the Department of Veterans Affairs can all provide insurance policies.
Loans That Qualify
Only loans taken out on or after January 1, 2007 are eligible for the mortgage insurance premium deduction. The insurance coverage must cover loans for the purchase of a first or second house. A home acquisition debt is one whose proceeds are utilized to purchase, construct, or significantly enhance a home.
You can’t usually rent out your second house; instead, you must utilize it for personal purposes, such as a holiday home. However, if you classify the second property as an income-producing business asset, you may still be eligible for a deduction. Cash-out refinances and home equity loans do not qualify for the deduction. Refinance loans up to the initial mortgage amount, on the other hand, are insured.
If your adjusted gross income exceeds $109,000, or $54,500 if you’re married and filing a separate tax return, you won’t be able to claim this deduction. At lower income levels, the deduction begins to “phase out”: $100,000 for single, head of household, and married filing jointly taxpayers, and $50,000 for married taxpayers filing separate returns. For each $1,000 that your income reaches $100,000 or $50,000, whichever number is relevant, you must deduct 10% from the amount of premiums you paid under this phase-out.
On line 37 of your Form 1040 tax return, you’ll see your AGI.
Claiming the Deduction
Form 1098 is used to report mortgage insurance premiums paid during the year. After the tax year ends, you should receive this paperwork from your lender. Box 4 contains the amount you paid in premiums. If you and your loan qualify, there is currently no limit to the amount of the deduction you can claim.
This entire sum is deductible. According to an IRS rule released in Notice 2008-15, prepaid insurance premiums can be apportioned throughout the length of the loan or 84 months, whichever period is shorter.
Mortgage insurance premiums are deductible as an itemized deduction on your tax return. Line 13 of Schedule A, “Interest You Paid,” is where they’re reported. If you use the standard deduction, you won’t be able to claim the mortgage insurance premiums deduction; you’ll have to itemize using Schedule A.
Canceling Your Insurance
Because there’s no way of knowing when or if Congress will extend this deduction, it’s a good idea to compare your current mortgage debt to your home’s fair market value. When your equity in the home hits 20%, you’re no longer required to pay private mortgage insurance, but neither your lender nor the insurer will tell you this.
When you reach this magical number, no one will voluntarily terminate your policy for you, but you may. Prepare to have your home evaluated or assigned a value by an expert in order to demonstrate that insurance is no longer required. Even if Congress decides not to renew the credit, you may be able to save money by canceling your coverage.