One major piece of the “Fiscal Cliff” conversation included an extension of the Mortgage Debt Forgiveness Act of 2007 that protects homeowners that short sale, deed in lieu or foreclose on their primary residence.
The expiration of this Act would have meant seriously large tax bills and floods of bankruptcies as distressed homeowners are required to pay taxes on any losses incurred through the default or loss of their home. That’s a pretty big deal and it deserves the coverage it got.
What has not received nearly as much news coverage is the reinstatement of the ability to treat Mortgage Insurance as a tax deduction which expired on January 1st, 2012. This is a HUGE win for homeowners and those folks looking to buy a home in 2013.
The mortgage insurance premium deduction dates to legislation enacted in 2006. It allows buyers and refinancers who use either private mortgage insurance or federal insurance or guarantees, and who itemize on their federal tax returns, to write off their premiums.
The mortgage interest tax deduction has been retroactively reinstated to apply to any mortgage insurance paid after December 31st, 2011
Borrowers who are single or married and filing jointly with adjusted gross incomes of $100,000 or less can write off 100% of their annual mortgage insurance premiums. Married homeowners filing singly can write off 50% of premiums. Borrowers with incomes above $100,000 may qualify for partial deductions on a sliding scale.
It now appears that the mortgage interest tax deduction has been retroactively reinstated to apply to any mortgage insurance paid after December 31st, 2011.
Here is Section 204 (page 25 of this PDF) in it’s entirety:
SEC. 204. EXTENSION OF MORTGAGE INSURANCE PREMIUMS TREATED AS QUALIFIED RESIDENCE INTEREST.
(a) IN GENERAL.—Subclause (I) of section 163(h)(3)(E)(iv) is amended by striking ‘‘December 31, 2011’’ and inserting ‘‘December 31, 2013’’.
(b) TECHNICAL AMENDMENTS.—Clause (i) of section 163(h)(4)(E) is amended—
EFFECTIVE DATE.—The amendments made by this section shall apply to amounts paid or accrued after December 31, 2011.
With FHA increasing mortgage insurance rates, and more increases scheduled for 2013, and with interest rates at all time lows allowing thousands of homeowners to refinance, this is a welcome surprise that will definitely put a few bucks back in your pocket for the next 2 tax years!
Disclaimer: I am not a licensed tax professional. For more information about how to claim this tax deduction, consult a tax professional or CPA.
Even though interest rates have ticked up slightly over the holidays, we are still at historic lows.
If it didn’t make sense to do a FHA or VA Streamline in the past few months, it might make sense now, especially now that your mortgage insurance premiums may be tax deductible.