|
A mortgage relief law - enacted in late 2007 - extends a "one-time" tax deduction for mortgage insurance premiums for three years (through 2010). Since then, the IRS has issued guidance showing how to allocate prepaid premiums for this deduction. (IRS Notice 2008-15) (Mortgage insurance is typically required by lenders for those who buy homes with low or no down payments.)
Significantly, the guidance approves a simplified method for taking mortgage insurance deductions. In most cases, you will come out ahead if the tax short-cut is elected on your personal tax return.
Background: For starters, you can deduct interest on up to $1 million of personal residence acquisition debt ($500,000 for married individuals filing separately). In addition, you may deduct interest on up to $100,000 of home equity debt. Acquisition debt is secured by a qualified residence for the purpose of acquiring, constructing or substantially improving the home. Interest on a refinanced mortgaged balance is deductible under the same rules.
Under a special tax law provision, mortgage insurance premiums paid or accrued during 2007 on contracts issued after 2006 can be treated as deductible mortgage interest on your tax return, subject to a phase-out. For this purpose, mortgage insurance includes coverage provided by the Veterans Administration, the Federal Housing Administration, the Rural Housing Administration and private insurers.
The phase-out of the deduction for mortgage interest begins at $100,000 of adjusted gross income (AGI). It is no longer available if your AGI tops $109,000. Taxpayers who fall within the phase-out range are entitled to a partial deduction.
The Mortgage Forgiveness Debt Relief Act, which was signed by the President on December 20, 2007, extends the special deductions for three more years through 2010. Thus, deductions may be available if the amounts:
- Are paid or accrued before January 1, 2011;
- Aren't properly allocable to any period after December 31, 2010; and
- Are paid or accrued in connection with a mortgage insurance contract issued after December 31, 2006.
The mortgage insurance provider is required to report the mortgage insurance premiums in box 4 on Form 1098, Mortgage Interest Statement, if they amount to $600 or more.
Here's how the tax short-cut works: To calculate the deduction, you can amortize prepaid mortgage insurance premiums over the shorter of the stated term of the mortgage or a period of 84 months. This begins with the month in which the insurance was obtained. If the mortgage is paid off before the insurance premium has been fully amortized, no deduction is generally allowed for the unamortized balance.
It may be necessary to contact the mortgage insurance provider reporting to find out how the amount reported on Form 1098 was calculated. The IRS decided the 84-month period was an appropriate time frame after reviewing comments from the mortgage industry. But it isn't written in stone, so it may change in the future.
In most cases, you will benefit from allocating mortgage insurance premiums over 84 months if your mortgage term is longer. This will produce bigger deductions in the early years of the contract.
|
As you can see, these "simplified" rules can be complex. If you qualify, we can help you take advantage of the deduction and all tax breaks available under constantly changing laws. Contact Tax Specialist Crystal Martin at 717-757-6999 or 800-745-8233 for more details. You may also email Crystal by using the form below. |
|
Full Newsletter
