Mortgage Insurance Tax Deduction

Legislation is still pending to determine if Mortgage Insurance (MI) will be an allowable deduction in 2014. The following information is not tax advice and you should consult your tax advisor regarding deductions.

MORTGAGE INSURANCE TAX DEDUCTION

Like the Mortgage Interest Tax Deduction, borrower-paid Mortgage Insurance that was acquired after 2006 can be tax deductible for 2013 on all loan program types secured by a primary residences and/or second home so long as the borrower meets certain income restrictions. There are various types of Mortgage Insurance options – such as monthly MI, single paid MI, and split premiums – and all MI types are eligible for the tax deduction. Check out our page on Mortgage Insurance for more details on the various types of MI. MI paid on investment properties and MI paid on cash-out refinances transaction are NOT tax deductible.

GOVERNMENT LOANS: FHA, VA, and USDA loans all have “mortgage insurance” that can be fully deducted in the year the loan was originated. FHA has an Up Front MIP (and Monthly MIP), VA has a Funding Fee, and USDA has a Guarantee Fee and all are allowed to be fully deducted in the year paid – even if they were rolled into the loan.

 

INCOME RESTRICTIONS

The MI tax deduction is based on a household’s Adjusted Gross Income (line 38 on the 1040 tax return) and does phase out after certain thresholds. The chart below outlines the income limitations and the percentage of MI that can be deducted.

SINGLE PAID MI

For conventional loans that included a Single-Paid MI premium, that amount must be deducted over 84 months (or the life of the loan – whichever is shorter). The catch is that each year the borrower’s income must still meet the requirements for each year of the deduction.

Example. Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. Ryan’s adjusted gross income (AGI) for 2012 is $76,000. Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months).

 

Please consult your tax professional for tax advice regarding Mortgage Insurance Tax Deductions.

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