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| Tax-Deductibility Overview |
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What is mortgage insurance (MI) tax-deductibility and how does it work?
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In 2006, a new federal law was passed making MI premiums tax-deductible for eligible borrowers on mortgages originated or refinanced in 2007. Previously, borrowers could not deduct the cost of their MI payments on their federal income taxes.
In late 2007, the itemized deduction for MI premiums on federal tax returns was officially extended for three years, through 2010. The law now allows Members with adjusted gross incomes up to $100,000 to deduct 100% of their MI premiums on their 2007-2010 federal tax returns.
In addition, even Members with adjusted gross incomes up to $109,000 can take advantage of a partial MI deduction on their 2007-2010 federal tax returns (the legislation includes a phase-out by 10% for each $1,000 a taxpayer’s adjusted gross income exceeds $100,000 with a cutoff of any deduction at $109,000). *
The legislation is effective for MI certificates issued through 2010.
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What is the reason for the MI tax-deductibility legislation?
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Expanding homeownership has long been a goal of the federal government. The federal government helps make homeownership more affordable for many homebuyers by making mortgage insurance tax-deductible in the first place, and the extension of the law will benefit even more homeowners.
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What savings amount can a typical homeowner with mortgage insurance expect?
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Individual savings will vary, depending on the loan size and a Member’s adjusted gross income and tax bracket. According to an analysis by Bankrate, a leading source of consumer financial information, a homeowner with a $180,000 mortgage would save about $351 in taxes a year.
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How many people in the United States use MI?
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Millions of people use MI every year – it’s an important factor in facilitating home purchases for first-time homebuyers and low-to moderate-income Members, as well as minority and immigrant Members. Most credit unions require a 20 percent down payment, which is the single biggest obstacle prospective homebuyers face. MI makes it possible for people to purchase a home with a down payment as low as 5 percent or even less.
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How long will this tax deduction be available?
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The recent legislation specifies that the tax deduction now applies to mortgage insurance contracts issued between 2007 and 2010, so it would include purchases and refinances within those years. However, Congress has the power to further extend the tax deduction to future years, or even to make it permanent.
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| Qualifications |
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Do all mortgage borrowers using mortgage insurance qualify for the MI tax deduction?
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Currently, this MI tax-deductibility legislation only applies to eligible Members with adjusted gross incomes of $109,000 or less who purchase or refinance a home between 2007 and 2010, and pay MI premiums.
Member-paid MI premiums allocable to 2007 through 2010 will be fully deductible for eligible taxpayers who are married, single or head-of-household, and who earn up to $100,000. The amount of the deduction incrementally phases out for those who have adjusted gross incomes between $100,000 and $109,000 annually.
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Is the deduction only for first-time homebuyers?
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No.
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Does the MI tax deduction apply to new purchases only? Are refinances also included?
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The MI tax deduction applies to purchases and refinances up to the original loan amount. This could include first and second mortgages but not any cash out.
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Are there any occupancy restrictions?
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The deduction applies to “qualified residence” as defined in the Internal Revenue Code. Generally, that includes the taxpayer’s principal residence and up to one other residence selected by the taxpayer for purposes of the deduction for qualified residence interest. Note – the other residence must be used for personal purposes by the taxpayer for 14 days or 10% of the days during the tax year that the unit is rented for fair value, whichever is greater, among other criteria in the tax code.
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Are investor loans eligible?
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No, investor loans are not eligible.
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Is there is a loan amount limit?
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No. It is only limited by the income of the taxpayer.
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Is deductibility applicable for all loan types?
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There is no differentiation among loan types. But the premium has to be considered “acquisition indebtedness” on a “qualified residence.”
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When refinancing a piggyback loan, for purposes of the deduction, is the original loan amount considered the sum of the two mortgages or only the primary mortgage amount without the second lien included?
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The sum of the two mortgages.
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What is the income threshold for married homeowners filing separately?
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For married homeowners filing separately, there is a $50,000 adjusted gross income threshold per person. The MI tax deduction is reduced by 10% for each $500 that the married Member’s adjusted gross income exceeds $50,000.
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| Reporting |
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Who has responsibility for reporting to the IRS?
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This reporting requirement parallels that for the mortgage interest deduction. The provision permits the Treasury to require by regulations that any person receiving payments of mortgage insurance premiums aggregating $600 or more for any calendar year to file an information return with the IRS and to provide a copy of such return to the individual making such payments. Unless the IRS issues guidance on this issue stating otherwise, CMG MI believes that Credit Unions generally are best positioned to have and provide this information.
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Has the IRS provided any information about the reporting of mortgage insurance premiums on 1098s?
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Yes. The IRS has posted information on its website at www.irs.gov/instructions (Scroll down to click on Form 1098; scroll down to Box 4).
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If the deduction is taken and subsequently the Member receives a refund for MI premiums, is that refund taxable as income?
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If the refund is for premiums that have not yet been deducted, as would generally be the case under the new provision when an upfront premium amount is amortized over the life of the mortgage insurance contract, the refund should not be taxable income to the Member.
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Do tax deductions have to be itemized on tax returns in order to take the deduction?
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Yes. In order to take advantage of the MI tax deduction, Members must include their MI premium payment information on their itemized tax returns.
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| Applying the Deduction to CMG MI's Products |
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How does the deduction apply to CMG MI’s Single Premium, in which the premium is financed and rolled into the mortgage loan amount? Can the premium be deducted in one calendar year?
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This amount is deductible as a mortgage insurance premium. Generally, the provision requires that amounts paid for mortgage insurance that are properly allocable to periods after the close of the taxable year are to be treated as paid in the period to which they are allocated. Thus, single premiums must be amortized over the life of the mortgage insurance contract, and cannot be deducted in one calendar year.
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If a financed single premium is paid by the seller as a concession, who, if anyone, gets the deduction?
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A concession by the seller to pay something at closing is a purchase price adjustment regardless of how it is described and, whether it is points or mortgage insurance, the cost is borne by the buyer. Theoretically, this would be analogous to “points” paid at closing, and should be deductible by the Member regardless of how it appears on the closing statement. However, because mortgage insurance premium deductibility is a new issue, the IRS may not reach the same conclusion. Regulations may be needed to answer this question.
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Note: Some rate plans may not qualify for the full deduction. |
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*Based on transactions closed 2008-2010, and Member-paid MI premiums allocable to those years. Deductions are phased out in 10% increments for Members with adjusted gross incomes between $100,000 and $109,000.
CMG MI cannot provide tax advice. Taxpayers should consult with their own tax advisors concerning the applicability of this new deduction to their particular circumstances under the Internal Revenue Code and the laws of any other taxing jurisdiction. This information was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. | |
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