The Protecting Americans from Tax Hikes Act
In 2006, a law called the Tax Relief and Health Care Act made it so people could deduct their mortgage insurance (extra cost to make sure the mortgage is paid if something happens to the borrower) on their taxes. In 2015, another law called the Protecting Americans from Tax Hikes Act (PATH Act) made it so people could keep deducting their mortgage insurance on their taxes. However, this was only for one year and ended on December 31, 2016. So now people can’t deduct their mortgage insurance on their taxes anymore.
The government used to allow people to deduct their mortgage insurance on their taxes, but this is not allowed anymore since 2016. However, this could change in the future because the government reviews this deduction every year and they could bring it back. President Trump wants to help middle-income families with his tax reform bill, so there’s a possibility that he might include a provision to bring back the mortgage insurance deduction. This means that the mortgage insurance deduction might come back but it’s not sure yet.
People who pay for extra insurance on their mortgage can usually deduct that cost from their taxes, but only if they earn a certain amount of money. This is called middle-income families. If a person earns too much money, they cannot claim this deduction. Other deductions related to mortgages, such as deductions for the interest and taxes, are still available in 2017. The only exception is the mortgage insurance deduction which is not certain if it will be available or not.
When someone buys a house and they can’t pay for at least 20% of it upfront, the bank might ask them to buy an extra insurance called private mortgage insurance. This is to make sure the bank gets paid back if something happens and the person can’t pay their mortgage. This insurance can be bought from a private company or from the government through Federal Housing Administration, the Department of Agriculture’s Rural Housing Service or the Department of Veterans Affairs.
Loans That Qualify
The mortgage insurance premium deduction is a way to reduce taxes on the extra insurance that people pay when they can’t pay 20% of the house upfront. This applies to loans taken out after Jan 1, 2007. The insurance policy must be for a first or second home that is used for the purpose of buying, building, or improving the home. If you use the second home as a vacation home and don’t rent it out, you can claim this deduction, but if you rent it out, you can’t claim this deduction. Also, this doesn’t apply on home equity loans or cash-out refinances but it applies on refinance loans up to the amount of the original mortgage.
Not everyone is able to claim the mortgage insurance premium deduction. You can only claim it if your income is below certain limits. If you’re single, your income must be less than $109,000 to claim the deduction. If you’re married and filing taxes separately, your income must be less than $54,500. The limit is lower if your income is more than $100,000 for single, head of household and married filing jointly taxpayers, and $50,000 for married taxpayers who file separate returns. If your income is above these limits, you can still claim a smaller amount of deduction by subtracting 10% for every $1,000 that your income exceeds the limits. You can find your income on line 37 of your Form 1040 tax return.
Claiming the Deduction
Your lender should give you a form called Form 1098 after the end of the year which shows how much you paid for mortgage insurance premiums. You can find the amount you paid in premiums in box 4 of that form. If you are eligible to claim this deduction, there is currently no limit on how much you can claim.
You can deduct the whole amount you paid for mortgage insurance premiums on your taxes. You can either deduct the entire amount that you paid in that year or spread it over the course of your loan or 84 months whichever comes first. This is according to a rule announced by IRS in Notice 2008-15.
The mortgage insurance premium deduction is reported on line 13 of Schedule A, which is called “Interest You Paid”. But to claim this, you need to itemize your deductions using Schedule A. You cannot claim this deduction if you take the standard deduction instead.
Canceling Your Insurance
It’s uncertain when or if the government will allow people to deduct their mortgage insurance again. In the meantime, it’s a good idea to check how much your home is worth compared to how much you still owe on your mortgage. You don’t have to pay extra for mortgage insurance when you own more than 20% of your home, but it’s likely that your lender or the insurance company will not tell you about it.
When you own more than 20% of your home, you no longer have to pay extra for mortgage insurance, but you need to let your lender know. The lender or the insurance company will not cancel the policy for you. So, you may need to get your home appraised by a professional to prove that the insurance is no longer required. Even though it is not certain if the government will allow mortgage insurance deduction again, you can still save money by canceling the policy when you no longer need it.