Mortgage Insurance Premiums Deduction: A Historical Perspective
For most Americans, owning a home is an integral part of the American Dream. However, for many individuals and families, purchasing a home can be financially challenging due to the high costs associated with buying property. To help alleviate this financial burden, Congress passed several laws that provide tax incentives to homeowners. One such incentive is the Mortgage Insurance Premiums (MIP) deduction.
In this article, we will explore the history of MIP deductions and how they work. We will also discuss recent changes to MIP deductions and their impact on homeowners.
What are Mortgage Insurance Premiums?
Before we dive into the details of MIP deductions, let’s first define what mortgage insurance premiums are. When you purchase a home with less than 20% down payment or equity in your property, lenders typically require you to pay for private mortgage insurance (PMI). PMI protects lenders against losses if borrowers default on their loans.
The cost of PMI varies based on several factors such as your credit score and loan-to-value ratio (LTV). It typically ranges from 0.3% to 1.5% of your loan amount per year.
If you have an FHA or USDA loan, you are required to pay for mortgage insurance premium (MIP) instead of PMI. MIP is similar to PMI in that it protects lenders against losses from defaults; however, it is administered by the Federal Housing Administration (FHA) or US Department of Agriculture (USDA).
MIP deductions were introduced as part of a broader effort by Congress to make homeownership more affordable for Americans.
History of MIP Deductions
The first version of MIP deductions was introduced in 2007 under President George W Bush’s administration as part of The Tax Relief and Health Care Act. At that time, taxpayers could deduct their qualified mortgage insurance premiums if they met specific criteria.
The criteria included that the mortgage insurance premiums were:
– Paid or accrued on a qualified residence
– Associated with the acquisition of a principal residence that is not a rental property
– Incurred after December 31, 2006
The maximum amount of MIP deductions allowed was capped at $100,000 or the loan’s original purchase price. However, this cap was gradually phased out for higher-income taxpayers who made more than $100,000 per year.
In 2015, Congress extended MIP deductions through December 31, 2016. However, they did not extend it further until President Trump signed The Further Consolidated Appropriations Act in December 2019.
Changes to MIP Deductions
Under the new law signed by President Trump in December 2019, homeowners can deduct their qualified mortgage insurance premiums paid or accrued after January 1st, 2020. The deduction is available to taxpayers whose adjusted gross income (AGI) is less than $109,000 as single filers and less than $218,000 as married filing jointly.
Similar to previous versions of MIP deductions, there are specific criteria that taxpayers must meet to qualify for this deduction. These include:
– You took out your mortgage between January 1stth and December 31stth of any tax year.
– Your home secured by your mortgage must be your primary residence.
– Your AGI does not exceed certain thresholds based on your filing status (as previously mentioned).
It’s important to note that if you refinanced an existing loan during this period and paid upfront PMI premiums when you initially obtained your old loan but also had them added into the balance of your new refinance loan then you will need to break down these payments between two different time periods: before and after refinancing so as only those associated with obtaining the initial loan are eligible for deduction under IRS rules governing PMI write-offs.
How to claim the MIP Deduction
To claim your MIP deduction, you must itemize your deductions on Schedule A of Form 1040. You will need to report the amount of MIP premiums paid or accrued during the tax year and include it in your total mortgage interest payments.
This deduction is subject to phase-out for higher-income taxpayers whose AGI exceeds $100,000 as single filers and $50,000 for married filing separately. The deduction is entirely phased out if your AGI exceeds $109,000 as a single filer or $218,000 as married filing jointly.
Conclusion
Mortgage insurance premiums can be an expensive addition to homeownership costs. However, with the recent changes made by Congress in December 2019 under President Trump’s leadership that allow taxpayers who meet specific criteria and income thresholds to deduct their qualified mortgage insurance premiums from their taxes provide some relief.
It’s essential to stay up-to-date with any future changes regarding MIP deductions since future legislation may impact this incentive significantly. If you have questions about how these deductions work or whether you qualify for them, speak with a licensed tax professional before completing your tax return each year.