Tax Tips: Mortgage Insurance

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When discussing items that are deductible under the “Interest” category on Schedule A I forgot to include mortgage insurance premiums.

Mortgage insurance, often referred to as PMI (private mortgage insurance), is a policy that protects the lender against non-payment if you default on your loan. It is often required when acquiring a mortgage with a lower down-payment because of the high level of default risk involved.

A deduction for mortgage insurance premiums was first allowed in 2007, and is currently available through 2010. It is an odd deduction, obviously the result of successful lobbying by the mortgage insurance industry.

You can deduct the mortgage insurance premiums paid in 2009 on insurance contracts issued after Dec. 31, 2006, in connection with the purchase of your personal residence. It can be on your primary residence or a second personal residence.

Mortgage insurance premiums are only deductible on “acquisition debt” loans. If you refinance a mortgage to take out additional cash that is not used to substantially improve your residence, for example to buy a car, pay off credit cards or pay for college, any PMI premiums charged will not qualify for the deduction.

The deduction is phased-out as your Adjusted Gross Income goes from $100,000 to $110,000 (or $50,000 to $55,000 for Married Filing Separate). It is not available for taxpayers, either married or single, with an AGI of more than $109,000, and separate filers with AGI that exceeds $54,500.

Mortgage insurance premiums are reported on Box 4 of Form 1098.

New Jersey tax pro Robert D. Flach has been preparing 1040s for individuals since 1972.

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