One of the great things about homeownership is the ability to take advantage of money saving tax breaks, such as property tax and mortgage interest deductions.
These deductions can greatly reduce the cost of homeownership for taxpaying individuals who itemize their deductions.
But what about other common costs, such as mortgage insurance that so many homeowners tend to pay these days because they can’t muster 20% down?
Mortgage Insurance Isn’t Deductible in 2014
Well, thanks to the Tax Relief and Health Care Act of 2006 and the Mortgage Forgiveness Debt Relief Act of 2007, mortgage insurance premiums have been tax deductible since 2007. They are simply treated as home mortgage interest, according to IRS rules.
This applies to mortgage insurance provided by the VA, the FHA, the Rural Housing Service (USDA loans), and private mortgage insurance tied to conventional loans.
Later, the American Taxpayer Relief Act of 2012 extended this provision until the end of 2013 as part of fiscal cliff negotiations.
But it expired in 2014, and unless the Senate Finance Committee’s tax extenders package (EXPIRE Act of 2014) gains approval, homeowners won’t be able to deduct private mortgage insurance or any other mortgage insurance premiums paid this year (or next).
If it does pass, it will apply to mortgage insurance premiums paid in 2014 and 2015.
While the savings may not make or break a homeowner, it could amount to hundreds or even thousands of dollars in potential costs annually.
Stop Extending It and Just Make It Permanent
Though homeowners have been fortunate enough to benefit from extension after extension, the uncertainty clearly doesn’t allow homeowners to budget properly.
It also clouds the decision of whether paying mortgage insurance is a good idea or not. After all, you don’t really know the true cost.
Enter Devin Nunes (R-CA), and co-sponsor Joseph Crowley (D-NY), who introduced H.R. 4845 in the House of Representatives on June 11th.
The bill aims to amend the Internal Revenue Code of 1986 so mortgage insurance premiums are permanently deductible. This way homeowners won’t have to worry about the bill getting extended each year.
It still has a long way to go, but it could mark a huge victory for the mortgage insurance industry, seeing that it will make the option of taking on PMI a lot more attractive. At least it can be sold that way…
This is especially important seeing how expensive mortgage insurance premiums are on FHA loans nowadays, making them less affordable than conventional loans in some cases.
And with so many prospective homeowners looking to the FHA, or other low-down payment options, this could be a real lifesaver.
The bill is in its infancy, and has just been referred to the House Committee on Ways and Means.
There Are Still Deduction Limits
Keep in mind that even if this bill becomes law, or the tax extenders finally come to fruition, there are still limits on the MIP deduction.
As it stands now, you can fully deduct mortgage insurance premiums if your adjusted gross income (AGI) is $100,000 or less, per the IRS. However, the mortgage insurance must be associated with home acquisition debt on a main or second home.
It then gets phased out at 10% per $1,000 in income up to $109,000 in AGI, after which point it can no longer be deducted.
Contact your CPA or tax preparer to determine if you can deduct mortgage insurance premiums assuming any of these bills extend the deduction into 2014 and beyond.
For the record, a two-year extension is expected to cost $1.85 billion over 10 years, which makes it abundantly clear why its passage is not guaranteed.