Monday, June 04, 2007

Private Morgtage Insurance A Tax Deduction

Starting in tax year 2007 you will now be able to deduct Private Mortgage Insurance (PMI). PMI is required when you financing more than 80% of your home, or in other words put less than 20% down payment. But there is eligibility and qualification in order to take this deduction. But this year, anyway, part of the equation involves the ability to write off a portion of your mortgage-insurance premiums.

That might not be as great as it sounds, however. For one thing, it's not a dollar-for-dollar write-off. Like mortgage interest, it is a "below the line" deduction based on your tax bracket. So, if you are in the 31 percent bracket, your tax benefit is only 31 cents on every dollar of insurance premium.

For another, you can claim the write-off only if you file an itemized return. Most homeowners do, because the tax-deductible mortgage interest and property taxes they pay are usually greater than the standard write-off. But if the standard deduction is more beneficial, the MI deduction is useless.And one more thing: The deduction is limited to borrowers with adjusted gross incomes of $109,000 or less.

You will be eligible for the full deduction if you earn $100,000 or less of your AGI, which means your family's gross earnings, less certain adjustments for tax-deductible IRA contributions and interest on student loans. But for every $1,000 of income above the $100,000 threshold, your write-off for mortgage insurance will be reduced by 10 percent.

Despite this, the average annual savings for taxpayers taking the mortgage-interest write-off will be in the $300 to $350 range, according to the mortgage insurance trade group. There are a few other qualifications worth mentioning as well:

The write-off applies only to mortgages on a principal residence and one vacation property held for the personal use of the taxpayer for 14 days or 10 percent of the days it is rented, whichever is greater.

It applies to refinances up to the original loan amount. This could include first and second mortgages but not cash-out refinances. When refinancing a piggyback loan, the original loan amount is considered the sum of the first and second mortgages.

It applies to move-up borrowers, not just first-timers. But investor loans are not eligible.

There is no loan limit. The only ceiling is on the taxpayer's income.

The deduction does not apply to lender-paid mortgage insurance in which the premiums are built into the interest cost of the loan. The cost of LPMI is already deductible as interest.

Finally, if you prepay a year's worth of premiums at closing, which is a popular option, or choose to finance the entire premium by rolling it into the loan amount, only the amounts allocable to the period between the closing date and the end of the 2007 tax year will be deductible. You can't write off the whole amount in one year. Courtesy of Orlando Sentinel 5/31/07.