Wednesday, March 12, 2014

Mortgage Insurance--Deductible on Taxes?

Another great Tax Tip article courtesy of Al Clark's HomeAction Newsletter that I must pass on.  I never want you not to be in the "know".

Please read the entire article.  The last couple of sentences are key!!!!


Deducting Mortgage Insurance

Second in a four-part series of tax tips for homeowners

If you put down less than 20 percent when you bought your home, your lender likely asked you to get mortgage insurance. Those mortgage insurance premiums may be deductible on your federal income taxes if you itemize and you also meet other requirements.

The mortgage insurance deduction is there for you to use on your 2013 taxes, but you may not get it next year. It expired at the end of 2013 and won't be available in 2014 unless Congress renews it.

How does your tax refund stack up? Are you getting more or less than average taxpayer? For early filers, the average federal refund totaled $3,211, an increase of $190 from 2013. Get advice about the tax credits available for this filing season and answers to your other tax questions from the IRS' Interactive Tax Assistant.  Once you file, you can use Where's My Refund? to track the progress of your refund.

Mortgage Insurance Deduction Rules

To use the mortgage insurance deduction, you have to clear some hurdles:
  1. You can only deduct mortgage insurance premiums for a mortgage you got on or after Jan. 1, 2007.
  2. If you refinanced in 2007 or later, you can deduct the mortgage insurance premiums for the portion of your loan equal to your original loan.
Look in Box 4 of the Form 1098 your mortgage lender sends you to find out how much you paid for mortgage insurance premiums for 2013.

Income Limits

Even if your loan meets those qualifications, to take the deduction, you still have to meet income requirements based on your adjusted gross income. Your AGI appears on Form 1040, line 38.

In general, the deduction gets reduced if your adjusted gross income is more than $100,000 ($50,000 married filing separately) and you lose it completely when you adjusted gross income goes above $109,000 ($54,500 married filing separately).
Use the IRS' itemized deductions work sheet (line 13) to see if your adjusted gross income will limit your mortgage insurance deduction.

Deducting Upfront Mortgage Insurance Premiums

If you paid a big mortgage insurance premium at settlement, called an upfront fee, your deduction may work differently than the deduction for monthly payments (but you still have to follow all the rules mentioned above).

"Mortgage insurance provided by the Department of Veterans Affairs and the Rural Housing Service is commonly known as a funding fee and guarantee fee respectively," the IRS says. "These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013."

If you paid in advance for any other mortgage insurance, you have to allocate those fees over the shorter of:
  • The mortgage term (usually 15 or 30 years)
  • 84 months (seven years)
If you pay off the loan, your deduction ends -- you cannot deduct the remaining amount.

Here's an example the IRS uses to explain the upfront mortgage insurance deduction:
Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May.

Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months.

Ryan's adjusted gross income (AGI) for 2012 is $76,000. Ryan can deduct $880 ($9,240 ? 84 x 8 months) for qualified mortgage insurance premiums in 2012.

For 2013, Ryan can deduct $1,320 ($9,240 ? 84 x 12 months) if his AGI is $100,000 or less.

In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). 
Tax laws and tax rules are constantly being updated and interpreted. This article contains general information, so please discuss your individual situation with a trusted tax adviser before making tax decisions.
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