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What is mortgage insurance (MI) tax deductibility and how does it work? |
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The law provides for an itemized deduction on federal tax returns for the cost of private mortgage insurance paid by eligible borrowers. Prior to 2007, borrowers could not deduct the cost of their mortgage insurance payments. Now the law has been extended through 2011.
The federal law allows qualified borrowers with adjusted gross incomes up to $100,000 to deduct 100% of their
2007-2011 MI premiums on their federal tax returns.
The legislation is effective for borrower-paid premiums allocable to mortgage insurance certificates issued between 1.1.07 and 12.31.11.
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What is the reason for the MI tax-deductibility extension?
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Expanding homeownership has long been a goal of the federal government. The federal government helps make homeownership more affordable for many homebuyers by making mortgage insurance tax-deductible, and the extension of the law will benefit even more homeowners.
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How long will this tax deduction be available? |
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The legislation specifies that the tax deduction applies to mortgage insurance certificates issued between 1.1.07 and 12.31.11, so it would include purchases and refinances within those years. However, Congress has the power to extend the tax deduction to future years, or even to make it permanent.
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Do all mortgage borrowers using mortgage insurance qualify for the MI tax deduction? |
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Currently, this MI tax-deductibility legislation only applies to eligible borrowers with adjusted gross incomes of $109,000 or less who purchase or refinance a home in 2007-2011, and pay mortgage insurance premiums.
Borrower-paid mortgage insurance premiums allocable to 2007-2011 will be fully deductible for eligible taxpayers who are married, single or head-of-household and who earn up to $100,000. The amount of the deduction incrementally phases out for those who have adjusted gross incomes between $100,000 and $109,000 annually.
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What is the income threshold for married homeowners filing separately? |
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For married homeowners filing separately, there is a
$50,000 adjusted gross income threshold per person. The MI tax deduction is reduced by 10% for each $500 that the married borrower’s adjusted gross income exceeds $50,000.
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Is the deduction only for first-time homebuyers? |
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No.
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Q. |
Does the MI tax deduction apply to new purchases only or are refinances included too? |
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The MI tax deduction applies to purchases and refinances up to the original loan amount. This could include first and second mortgages but not any cash out.
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Are there any occupancy restrictions? |
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The deduction applies to “qualified residence” as defined in the Internal Revenue Code. Generally that includes the taxpayer’s principal residence and up to one other residence selected by the taxpayer for purposes of the deduction for qualified residence interest. Note – the other residence must be used for personal purposes by the taxpayer for 14 days or 10% of the days during the tax year that the unit is rented for fair value, whichever is greater, among other criteria in the tax code.
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Are investor loans eligible? |
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No, investor loans are not eligible.
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Is there is a loan amount limit? |
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No. It is only limited by income of the taxpayer.
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Is deductibility applicable for all loan types? |
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There is no differentiation among loan types. But the premium has to be considered “acquisition indebtedness” on a “qualified residence.”
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Does the MI tax deduction apply to lender-paid mortgage insurance (LPMI)? |
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No. LPMI is a product in which the MI premiums charged to a lender are not passed on to the borrower in the escrow arrangement; instead, they are paid by the lender or are passed on to the borrower, if at all, via increases in the loan interest rate or other fees. Most mortgage interest is already deductible under the tax code.
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When refinancing a piggyback loan, for purposes of the deduction, is the original loan amount considered the sum of the two mortgages or only the primary mortgage amount without the second lien included?
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The sum of the two mortgages.
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If the deduction is taken and subsequently the borrower receives a refund for MI premiums, is that refund taxable as income? |
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If the refund is for premiums that have not yet been deducted, as would generally be the case under the new provision when an upfront premium amount is amortized over the life of the
mortgage insurance contract, the refund should not be taxable income to the borrower.
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Do tax deductions have to be itemized on tax returns in order to take the deduction? |
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Yes. In order to take advantage of the MI tax deduction, borrowers must include their MI premium payment information on their itemized tax returns.
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Q. |
How does the deduction apply to PMI's Super SingleSM premium in which the premium is either paid upfront or financed into the mortgage loan amount? Can the premium be deducted in one calendar year? |
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If the borrower paid a lump-sum mortgage insurance premium that pays for insurance coverage for a period potentially extending more than one year (such as for Super Single coverage), the deduction for a specific tax year typically is based only on the portion of the premium that pays for insurance for that year. This applies whether the lump-sum premium was paid upfront or financed into the loan amount. The portion of the lump-sum premium that is properly allocable to periods after the close of the taxable year are to be treated as paid in the period to which they are allocated. Thus, lump-sum premium payments must be amortized over the life of the mortgage insurance contract, and cannot be deducted in one calendar year.
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