Is Mortgage Insurance (MI, also called Private Mortgage Insurance PMI) tax deductible in California? We will address this question and some other FAQs about Mortgage insurance in this post?
Q. What is mortgage insurance (MI) tax deductibility and how does it work?
A. 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. (Update – Jan 2nd, 2013 – The congress just passed the bill to extend it till end of 2013). The federal law allows qualified borrowers with adjusted gross incomes up to $100,000 to deduct 100% of their 2007-2013 MI premiums on their federal tax returns.
Q. What is the reason for the MI tax-deductibility extension?
A. 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.
Q. What savings amount can a typical homeowner with mortgage insurance expect?
A. Individual savings will vary depending on the size of the loan and a borrower adjusted gross income and tax bracket. According to an analysis by Bankrate, a leading source of consumer financial information, a homeowner with a $180,000 mortgage would save about $351 in taxes a year.
Q. How long will this tax deduction be available?
A. The legislation specifies that the tax deduction applies to mortgage insurance certificates issued in 2007-2013, 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.
Q. Do all mortgage borrowers using mortgage insurance qualify for the MI tax deduction?
A. 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 allocatable to 2007-2013 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.
Q. What is the income threshold for married homeowners filing separately?
A. 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 adjusted gross income exceeds $50,000.
Q. Is the deduction only for first-time home buyers?
Q. Does the MI tax deduction apply to new purchases only or are refinances included too?
A. 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.
Q. Are there any occupancy restrictions?
A. The deduction applies to qualified residence as defined in the Internal Revenue Code. Generally that includes the taxpayers 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.
Q. Are investor loans eligible?
A. No, investor loans are not eligible.
Q. Is there is a loan amount limit?
A. No. It is only limited by income of the taxpayer.
Q. Is deductibility applicable for all loan types?
A. There is no differentiation among loan types. But the premium has to be considered “acquisition indebtedness on a qualified residence.
Q. Does the MI tax deduction apply to lender-paid mortgage insurance (LPMI)?
A. 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.
Q. 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?
A. The sum of the two mortgages.
Q. Who has responsibility for reporting to the IRS?
A. This reporting requirement parallels that for the mortgage interest deduction. The provision permits the Treasury to require by regulations that any person receiving payments of mortgage insurance premiums aggregating $600 or more for any calendar year to file an information return with the IRS and to provide a copy of such return to the individual making such payments. The lender generally is best positioned to have and provide this information but, until regulations are issued, there is no certainty regarding this responsibility.
Q. If the deduction is taken and subsequently the borrower receives a refund for MI premiums, is that refund taxable as income?
A. 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.
Q. Do tax deductions have to be itemized on tax returns in order to take the deduction?
A. Yes. In order to take advantage of the MI tax deduction, borrowers must include their MI premium payment information on their itemized tax returns.
Q. How does the deduction apply to PMI Super SingleSM premium in which the premium is financed and rolled into the mortgage loan amount? Can the premium be deducted in one calendar year?
A. This amount is deductible as a mortgage insurance premium. Generally, the provision requires that amounts paid for mortgage insurance that are 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, single premiums must be amortized over the life of the mortgage insurance contract, and cannot be deducted in one calendar year.
Q. If a financed single premium is paid by the seller as a concession, who, if anyone, gets the deduction?
A. A concession by the seller to pay something at closing is a purchase price adjustment regardless of how it is described and, whether it is points or mortgage insurance, the cost is borne by the buyer. Theoretically, this would be analogous to points paid at closing, and should be deductible by the borrower regardless of how it appears on the closing statement. However, because mortgage insurance premium deductibility is a new issue, the IRS may not reach the same conclusion. Regulations may be needed to answer this question.