By: Liz Schneider, Dollar Bank
Congress recently reinstated the Mortgage Insurance deduction.
The new law is effective for amounts paid for MI attributable to the 2018, 2019 and 2020 tax years.
The federal government supports home ownership and helps make home ownership more affordable for more homebuyers through this MI tax deduction.
The federal MI tax deduction allows borrowers with adjusted gross incomes up to $100,000 to take advantage of the full MI tax deduction — 100% of the MI premium for a qualifying loan is subject to this tax deduction.
Borrowers with adjusted gross incomes up to $109,000 can take advantage of a partial MI tax deduction. For each additional $1,000 of gross household income above $100,000, the MI deduction is reduced by 10%, with a cutoff of any deduction at $109,000.
Married persons filing separately, with adjusted gross income of $50,000 or less are each able to deduct 50% of their MI premiums. For each additional $500 of gross household income above $50,000, the MI deduction is reduced by 5%, with a cutoff of any deduction at $54,500.
The deduction applies to existing homeowners as well as to first-time homebuyers. The MI tax deduction applies to MI premiums for purchase and refinance loans for “qualified residences” as defined in the Internal Revenue Code. This generally includes the borrower’s primary residence and one other qualified residence. Investor loans are not eligible. Arch MI’s Monthly, Single- and Split-Premium MI payment plans are all eligible for the tax deduction. For upfront payment plans, borrowers should consult with a professional tax adviser to determine the amount of the MI premium eligible for the tax deduction.
The current tax deduction legislation applies to MI premiums attributable to the 2018, 2019 and 2020 tax years. Congress has the power to extend the tax deduction to later years through future legislation.
The deduction applies to a “qualified residence.”. Generally, that includes the taxpayer’s 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 tax code criteria.
The MI tax deduction applies to purchases and refinances up to the amount of acquisition indebtedness as defined in the Internal Revenue Code. This could include first and second mortgages but may not include the full amount of a cash-out refinance. Borrowers with cash-out refinances should consult a professional tax adviser to determine the amount of MI premium eligible for the tax deduction.
In order to take advantage of the MI tax deduction, borrowers must include their MI premium payment information on an itemized tax return.
As always, consult your tax professional with any questions that relate to your personal tax return.