Mortgage insurance premiums can increase your monthly budget significantly. They averaged between $100 and $200 a month as of the end of 2016. But sometimes they’re tax deductible—at least through the end of that tax year.
The Protecting Americans from Tax Hikes Act
The Tax Relief and Health Care Act first introduced the mortgage insurance deduction in 2006. Congress extended it in 2015 when it passed the Protecting Americans from Tax Hikes (PATH) Act. But under the terms of the PATH Act, the deduction expired on December 31, 2016. The extension was only good for one year.
The deduction may not be gone for all time because Congress can renew it. This is one of those deductions that the government reviews annually, and it may be addressed under President Trump’s tax reform bill, which he has said is aimed at helping middle-income families.
Taxpayers who can claim this deduction are middle-income families because it phases out and becomes unavailable at higher income levels. Deductions for mortgage interest and real estate taxes remain safe in 2017. Only the mortgage insurance deduction is in limbo.
Mortgage Insurance
Lenders typically require private mortgage insurance to secure the debts in the event of default. It’s charged to buyers are unable to make down payments of at least 20 percent. The insurance policy can be issued by a private insurance company or by the Federal Housing Administration, the Department of Agriculture’s Rural Housing Service or the Department of Veterans Affairs.
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 home acquisition debt on a first or second home. 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.
Income Limitations
You’re not eligible to claim this deduction if your adjusted gross income exceeds $109,000, or $54,500 if you’re married and filing a separate tax return. The deduction begins “phasing out” at lower income limits: $100,000 for single, head of household and married filing jointly taxpayers, and $50,000 for married taxpayers who file separate returns. This phase-out requires that you must subtract 10 percent from the amount of the premiums you paid for each $1,000 that your income exceeds $100,000 or $50,000, whichever number is applicable.
You can find your AGI on line 37 of your Form 1040 tax return.
Claiming the Deduction
Mortgage insurance premiums paid during the year are reported on Form 1098. 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. Prepaid insurance premiums can be allocated over the term of the loan or 84 months, whichever period is shorter, under a ruling from the IRS announced in Notice 2008-15.
Mortgage insurance premiums are an itemized tax deduction. 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.
Canceling Your Insurance
Because there’s no telling when or if Congress will breathe additional life into this deduction, it can pay to check your current mortgage balance against your home’s fair market value. You no longer have to pay private mortgage insurance when your equity in the property exceeds 20 percent, 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, you may be able to save some money regardless by taking steps to cancel your policy.
