This article should not be considered tax advice. For tax-related questions or mortgage strategy related to your individual tax liability, speak with a licensed accountant.
The American Taxpayer Relief Act of 2012 extends a mortgage-related law which expired at the end of 2011.
Mortgage insurance is, once again, a tax-deductible expense for eligible U.S. homeowners.
What is Mortgage Insurance?
Mortgage insurance, in general, describes an insurance policy which protects lenders against loan default.
For example, if a lender such as Wells Fargo or Bank of America makes a loan to a homeowner and that homeowner stops making payments, the loan defaults and the bank takes a loss. Mortgage insurance protects against this loss. In the event of default, the mortgage insurer pays a claim to the loan servicer.
Not all mortgages require homeowners to pay for a bank’s mortgage insurance.
For example, conventional mortgages for which the loan-to-value (LTV) is 80% or less; VA mortgages; and most jumbo portfolio loans waive mortgage insurance requirements. By contrast, conventional loans with less than 20% equity; FHA mortgages; and USDA home loans each require that homeowners pay mortgage insurance.
The monthly mortgage insurance payment is collected as part of the mortgage payment, and processed by the lender.
Mortgage Insurance Tax Deductible Retroactively
As part of this year’s “Fiscal Cliff” negotiations, the American Taxpayer Relief Act of 2012 passed. In it was a rule which re-instated the tax deductibility of mortgage insurance premiums.
The law covers the fiscal years of 2012 and 2013, which makes it retroactively available for 2012 tax filings even though the original mortgage insurance tax deductibility rules expired more than 12 months ago.
The American Taxpayer Relief Act of 2012 makes it possible for borrowers with itemized federal tax returns and an annual adjusted gross income of less than $100,000 to deduct 100% of their annual mortgage insurance premiums on the federal income tax filings.
For borrowers with an adjusted gross income of more than $100,000 per year, deductions are still available, but they phase-out as income levels rise.
Mortgage insurance of all types are eligible for deductions. This includes conventional private mortgage insurance (PMI) from mortgage insurers such as Radian, MGIC and United Guaranty. It also includes mortgage insurance premiums (MIP) due to the FHA and USDA.
VA mortgages do not require mortgage insurance.
How Much Home Can You Afford?
As a home buyer or refinancing household, the tax deductibility of mortgage insurance can lower your total homeownership costs. Mortgage insurance premiums paid monthly may be credited against your annual federal income tax returns.
Everyone’s tax situation is different, however, and not all homeowners will itemize deductions. Speak with your tax professional to see how the new mortgage insurance tax deduction rules will work for you. Then, to see how much home you can afford, take a look at today’s mortgage rates and work your household budget.