As April 15 tax day approaches, here is a reminder for home buyers with mortgage insurance.Home owners with adjusted gross incomes of $100,000 or less can deduct the full cost of their government or private mortgage insurance premiums on their 2007 federal returns.Families with incomes between $100,000 and $109,000 are eligible for a reduced deduction.This is a new tax break that Congress has approved through 2010. “On average, this year’s tax break could be worth $350 per taxpayer — an annual deduction that qualified home owners can take each year through 2010,” says Kevin Schneider, president of the Mortgage Insurance Companies of America (MICA).
Source: MICA (03/26/08)
On December 20, 2006, President George W. Bush signed into law new tax legislation that provides for the itemized deduction on federal tax returns of the cost of mortgage insurance paid by eligible borrowers for the 2007 tax year. In the past, borrowers could not deduct the cost of mortgage insurance for tax purposes. The legislation affects borrowers with mortgage insurance contracts issued between January 1 and December 31, 2007. These MI premiums paid during 2007 may qualify for tax deductibility on borrowers’ 2007 federal tax returns as follows:
- Borrowers with adjusted gross incomes of $100,000 or less may deduct 100 percent of their MI premiums.
- For adjusted gross incomes above $100,000, MI deductions are phased out at 10 percent increments, for every $1,000 (or $500 for a married individual filing a separate return) or fraction thereof of income above.
- $100,000 (or $50,000 for a married individual filing a separate return).
Make sure you take advantage of every break the IRS will give. Here are a few:
Points: According to the IRS, points must paid for the use of money, (for example, to obtain a lower interest rate) in order to be tax deductible. Origination fees that constitute a “service fee” are not tax deductible. IRS Publication 936 lists a general rule that states, “You generally cannot deduct the full amount of points in the year paid. Because they are prepaid interest, you generally must deduct them over the life (term) of the mortgage.” However, there are conditions which, if met, make discount points tax deductible in the year they are paid. (For more details on points and deductions, see http://www.irs.gov/publications/p936/ar02.html#d0e942.)
Pre−payment penalties: Sometimes, circumstances cause you to pull out of your mortgage sooner than expected. Fortunately, pre−payment penalties are tax deductible, which helps ease the pain.
Pro−rated real estate taxes: Even if the seller sent the tax collector the check, chances are you paid a pro−rated portion of the taxes for the year at closing.
Pro−rated mortgage interest: Depending on when in the month the home sale closes, you will pay either a hefty or a tiny amount of pro−rated mortgage interest for that month. Big or small, you can write that off. The Final Closing/Settlement Statement will show just how much they’re due.
Home construction loan interest: As long as the construction period doesn’t last more than two years before you make the new place your “principal residence,” you can write off the interest for that construction loan.
It pays to pay attention—all these write−offs can add up to some serious savings when tax time comes around.
“Points” paid to secure a home loan to buy or improve your principal residence are tax deductible; even if the Seller pays them for you, according to the IRS. A mortgage discount point is equal to 1% of the loan amount. Points are sometimes paid to get a more favorable interest rate and can be paid by either the Buyer or the Seller in a transaction.
Discount points are deductible in full in the year paid if they meet the following criteria:
· They are paid to buy your primary home.
· Your settlement statement identifies the amount as points.
· The amount is computed as a percentage of your loan.
· The amount is not more than is generally charged in your area for a similar size loan. Any additional amount will be treated as interest paid in advance and not deductible.
You may also choose to amortize the discount points over the life of the loan. They are immediately deductible even if financed over the life of the loan.
Points paid to refinance your existing home must be deducted over the life of the loan.
Always consult a tax specialist before taking these deductions.