Can I deduct mortgage insurance premiums?

March, 19 2014 by Dave Du Val, EA

Dear Dave,

We recently bought our 1st home via FHA mortgage, which included monthly mortgage insurance premium (MIP). In addition, an "up-front" MIP amount (UFMIP) was required, which we fully paid in cash at closing (most people don't do that, but instead finance UFMIP into their FHA loan). Is our UFMIP thus fully deductible in that year it was actually paid? Or, must our UFMIP deduction be amortized over several tax years? [Reference: IRS Pub. 936 states that UFMIP must be amortized when it is "properly allocable" to future tax years; however our understanding is that the definition of "properly allocable" contemplates whether or not the amount was actually paid out-of-pocket at the time - i.e. financed into the loan versus being fully paid in cash - at the closing settlement.] Please advise? Thank you Dave, in advance!

Sincerely,
Thomas

 

Hi Thomas,

Thank you for contacting us with your tax question. The PMI deduction was extended through 2013. If you qualify for the deduction, your prepaid mortgage premiums will need to be claimed over a period of 84 months (seven years) or the term of the mortgage, whichever is shorter. You can claim the amount allocable to the year you originated the loan on your 2012 or 2013 tax return, depending on the year you purchased it.

Before you claim the deduction, please make sure you qualify. The deduction begins to phase-out when your adjusted gross income, or AGI, is more than $100,000. This income limit applies to single, head of household or married filing jointly taxpayers. The phase-out range begins at $50,000 AGI for married persons filing separate returns. The PMI deduction is reduced by 10 percent for each $1,000 that your income is over the AGI limit. There is no deduction at all when your AGI is $109,000 or $54,500 for married filing separately taxpayers.

Please keep in mind that you will want to make sure you have documentation to prove your deduction in case it is ever questioned. This proof can be in the form of escrow statements and/or Form 1098, in conjunction with checks, receipts, etc.

Deductibly Yours,
Dave