Owning a home can be an expensive proposition. There is the mortgage, mortgage interest, homeowner’s insurance, property taxes, upkeep, and an added mortgage insurance premium for certain loan types and for people who do not have a big enough down payment when first purchasing their home.
Fortunately for homeowners, the government generally encourages homeownership in the form of tax breaks for many of the added expenses. Let’s talk about the tax break for qualified mortgage insurance, which was recently extended in the Obama tax cuts.
How to Avoid Paying a Mortgage Insurance Premium
It is always best to not have an expense to deduct in the first place as you will never recoup the entire cost through taxes, so let’s look at how you can avoid paying this mortgage insurance premium.
Mortgage insurance premiums are paid for all Department of Veterans Affairs loans, Federal Housing Administration loans, and for private mortgage loans where you have less than a 20% down payment upon closing. In order to avoid paying this insurance premium, go with a private loan and save up the 20% before purchasing your home.
Do I Have Mortgage Insurance Premiums?
Qualified mortgage insurance is mortgage insurance (MI) provided by the Department of Veterans Affairs (known as a funding fee), the Federal Housing Administration, or the Rural Housing Service (usually referred to as a guarantee fee), and private mortgage insurance (PMI).
The easiest way to determine if you are paying a mortgage insurance premium is to take a look at your 1098 tax form provided by your mortgage company. Any mortgage insurance premiums paid should be reflected in Box 4 of your 1098 form.
If you are still uncertain about whether or not you are paying this insurance premium, you can look on your closing documents, and/or contact your mortgage company to find out.
How do I Deduct Mortgage Insurance Premiums?
Take the information from Box 4 of form 1098 (provided by your mortgage company) and enter the information on Line 13 of Schedule A. The PMI tax deduction is part of the interest paid itemized deductions.
The MI and PMI insurance deduction is only available for contracts issued after 2006.
The mortgage insurance deduction was scheduled to end in 2010; it is extended to 2011 with the new tax bill. However, the PMI deduction 2011 will still only apply to mortgages taken out after 2006.
PMI Deduction 2010 Income Limits
If you have an adjusted gross income of less than $100,000, you can deduct your entire insurance premium. Those with an adjusted gross income of more than $100,000 and less than $109,000, will still be able to deduct these premiums, but only a percentage of them.
You will need to complete the Qualified Mortgage Insurance Premiums Deduction Worksheet found in the instructions for Schedule A (Form 1040) in order to determine the percentage.
If your adjusted gross income is higher than $109,000 ($54,500 if married, filing separately), then you are unable to take this tax deduction.
Check out the publication 17 for more information about this tax deduction.