Tax Update: Mortgage Insurance Premium Deduction Reinstated but Due to Expire at Year-End

What is the standard tax deduction? -

At the end of 2012, there was significant concern over the “Fiscal Cliff” and the potential expiration of several Bush-era tax cuts. Fortunately, last-minute negotiations by Congress extended many of these cuts, bringing relief to taxpayers.

One particular concern for homeowners was the expiration of the Mortgage Insurance Premium Tax Deduction at the beginning of 2012. This deduction has been reinstated and is now effective until December 31, 2013. Homeowners should note, however, that it is unlikely to be extended beyond this date.

What is the Mortgage Insurance Premium Tax Deduction?

When homebuyers purchase a property with less than a 20% down payment, they are usually required to pay mortgage insurance, often referred to as private mortgage insurance or PMI. This insurance is typically mandatory until the homeowner achieves 20% equity in the home.

For a time, homeowners who were required to pay PMI and who met specific criteria could deduct these payments from their taxable income:

  1. The insurance must be on mortgage acquisition debt for a primary or secondary residence.
  2. Homeowners needed to itemize deductions on their tax returns.

Potential Savings from the Deduction

Eligible homeowners with an adjusted gross income of $100,000 or less could deduct all their mortgage insurance premiums. The actual savings could range from $500 to over $1,000 annually, particularly for those in higher-cost living areas.

The deduction’s lapse last year made homeownership slightly more costly, but its temporary revival has again made it more accessible.

David Stevens, former Federal Housing Administration commissioner and now CEO of the Mortgage Bankers Association, noted that the inability to deduct mortgage insurance significantly impacts middle-income and first-time buyers, for whom affordability is crucial.

Other Ways to Save

While the deduction provides temporary relief, it’s wise to prepare for its potential discontinuation at the end of the year. Homeowners might consider saving a 20% down payment before purchasing to avoid the need for PMI. In high-cost areas, where even modest homes may exceed $750,000, some potential buyers opt for financial help from family to reach the 20% threshold—a deeply personal decision.

The reinstatement of the Mortgage Insurance Premium Tax Deduction offers significant savings for some homeowners but remember, it’s likely only a temporary reprieve.

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