Ross Garner, WalletHub Community Manager
@RossGarner
If you take out a government loan like those from the FHA, VA, or USDA, you will likely be required to take out mortgage insurance, which these agencies refer to as a Mortgage Insurance Premium (MIP).You will usually have to make two different payments for mortgage insurance, one upfront at closing and the other on a yearly basis.Both payments are tax deductible, though the rules for each are different.
The most important consideration is when you took out your loan.During the Great Recession, Congress temporarily made mortgage insurance payments tax deductible starting on loans made in 2006 or later.However, they did not renew the deduction for 2012, and there has been no indication that they intend to do so.As it stands, if your loan was taken out between 2006 and 2011, then mortgage insurance payments made during that time frame can be tax deductible.
The next important restriction is how much you make each year.If you and your spouse make less than $100k combined ($50k for single filers), then you are entitled to deduct the full cost of your mortgage insurance. However, for every $1k dollars over that limit you are, you lose 10% of your deduction, meaning if your joint income is more than $110k, you cannot make any deductions for mortgage insurance.
The complications with MIP come from the upfront payment you must make at the loan’s closing.Since this payment is meant to cover a portion of your mortgage insurance payment over the life of the loan, you can deduct only a proportional amount of it each year.To find out how much you can deduct for this upfront payment, first divide the total amount of your payment by the length of your loan in months.For instance, if you paid $5k upfront for a 15-year loan (180 months), then you could deduct $27.77 dollars per deductible month.The next step is to figure out how many deductible months you have.Since the mortgage insurance deduction was only allowed between January 2007 and December 2011, count every month you’ve had your loan for during that period. Continuing the above example, if you took out your loan in January 2008, you would have 48 deductible months, and could deduct $333.24 per year for the upfront payment.
Like with any other potential tax deduction, you have to itemize your taxes to benefit from the MIP tax deduction.To figure out if this is a good idea, you should add up your potential deductions (mortgage interest, mortgage insurance, etc.) and make sure they are larger than the standard deductions allowed currently ($11k for couples, and $5.5k for single filers).If your itemized deductions are not larger, then it will not benefit you to itemize your taxes, making the mortgage insurance deduction worthless.
Ashley Cass, Member
@ashuhms
If the mortgage insurance was issued between 2009 and 2014 you can deduct mortgage insurance premiums for a personal home you own.
You also should be sent a Form 1098 reporting those payments; you can deduct only a portion each year though.
Since FHA's policies change yearly you should consult with you tax preparation specialist just to be sure you report accurately.
A way to calculate the exact amount is to subtract your FHA discounts from your total MIP, and report the difference to the IRS.
Chris Le, Member
@antiboy
This type of deduction is a type of homeowner tax break that may apply if you pay a PMI (private mortgage insurance). Are you eligible? The answer is: it depends. You need to make sure you are very clear about what kind of insurance policy you have and what you’re using it for. Make sure that the insurance policy that you have is for “home acquisition debt” on a first or second home. These types of debts are for loans that you take out that are used to buy, build or substantially improve your home. Make sure you remember this fact as the PMI deduction gets trickier if the loans taken out are for re-financing or home equity because they are not eligible as a deductible. For refinancing, it only applies to refinances up to the original loan amount, but not to any extra cash you might get with the new home loan.
To see if you are eligible, you can check the details of your premiums on Form 1098, if you pay these premiums throughout the year. You can request this form from the lender. If they are pre-paid premiums that you are paying over the term of the loan or over 84 months (whichever is shorter), then you can check Notice 2008-15 from the IRS.
If your premium qualifies under the conditions above, you can report it on Schedule A of your tax return.
Do note that this was a temporary tax break that applies only to insurance policies issued on or between January 1, 2007 and December 31, 2013. If your insurance policy was issued after the latter date, you will not qualify. Congress may renew this tax break but it does not seem likely. In general, these tax breaks are generally quite fluid and can change in various ways year to year; you may have been eligible last year but that does not necessarily mean you are eligible this year.
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Hi Ross, As it has been a while since your response (which is great, btw! No one has been able to answer this as clearly as you have) I have a follow up question since this benefit has been extended through the end of 2013 as a result of the 'fiscal cliff' agreements. As I understand it, any 'prepaid' MI in the IRS's eyes can only be deducted in the year it will be applied in. So, for example, if I paid upfront the MI for 2010 and 2011 in 2010, I would only be able to deduct the 2010 amount in 2010 and the 2011 prepaid amount from 2010 in 2011. However, the UFMIP is a little different, right? Does it count as 'prepaid' even though it is all paid up front? If it is not actually prepaid (I can't find an answer to this ANYWHERE), then does it make a difference if the UFMIP was paid in cash in full at closing and not financed into the loan? I can understand that if the UFMIP is financed into the life of the loan why you would only be able to deduct the 'per month' prorated amount as you describe above. However, if you pay in cash in full, does that negate that point and allow me to deduct the full amount paid for UFMIP in the year it was paid (which would be 2013-I am closing on a house in about a month)? If it doesn't make a darn bit of difference, I will roll it into the loan. If it does, then I will pay it in full and then of course deduct it for 2013. Thanks!!