Homeowners with a new mortgage that is covered by insurance can claim a tax break on the insurance this year.
The break, called the qualified mortgage insurance deduction, lets taxpayers with an adjusted gross income of less than $100,000 write off the full cost of mortgage insurance. Folks who earn less than $109,000 can take a write-off for part of it.
To qualify, the mortgage must have originated between 2007 and 2010. The deduction can be taken for insurance on a principal residence or a second home.
Introduced by the Tax Relief and Health Care Act of 2006, the break initially applied only to the 2007 tax year, but it was extended through 2010 by the Mortgage Forgiveness Debt Relief Act of 2007.
"It's something we will definitely ask our clients about," said Jackie Perlman, senior tax research coordinator at H&R Block Inc. "If you come in and say you bought a home, we'll be checking it out and making sure you get that deduction."
The mortgage insurance deduction will help first-time home buyers who are unable to put down 20 percent of a mortgage. Typically, "if you put down less than 20 percent down, that's where the lender would require private mortgage insurance," said Katie Monfre, a spokeswoman for Mortgage Guaranty Insurance Corporation, a private mortgage insurer in Milwaukee owned by MGIC Investment Corporation.
On average, the annual tax break from the deduction will be worth around $350 per taxpayer, according to the Mortgage Insurance Companies of America, which represents mortgage insurers.
Bob Meighan, CPA and vice president at Intuit Inc., which makes TurboTax tax software, said he doesn't have an estimate of how many clients will take the deduction, but that claiming it is likely to be "pretty straightforward."
Private mortgage insurance protects the lender, not the homeowner, guarding against a situation in which a borrower defaults, leaving the lender unable to recover costs after foreclosing on the loan.
About one in 10 residential mortgages is covered by private mortgage insurance, according to Jeff Lubar, a spokesman for MICA. That number rises if one includes government loans, many of which are also covered by mortgage insurance.
The new tax deduction can be taken for both private mortgage insurance and insurance provided by the Department of Veterans Affairs, the Federal Housing Administration and the Rural Housing Administration, according to Perlman.
Mortgage insurance premiums should be reported in Box 4 of Form 1098, which borrowers get from their lenders each year.
For some homeowners, the new deduction will be an incentive to get private mortgage insurance rather than a so-called piggyback loan. A piggyback loan is actually two or more loans; it involves taking out separate loans to cover principal and a down payment. The option has been used by people who can't afford a down payment outright.
"Before, the interest rate on the second mortgage was deductible and for mortgage insurance it wasn't," said Monfre. "This has evened the playing field, and both are now deductible."
More lenders are requiring mortgage insurance these days because of the increased risk in the marketplace, according to Monfre.