Homeownership offers many tax benefits. But recently, laws have been modified so that two home-related costs — private mortgage insurance and property tax payments — get special treatment at tax-filing time.
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Real estate taxes have always been part of property ownership, as well as a valuable tax break for owners who itemized. Now some homeowners can add at least a part of their property tax payments into their standard deduction amount.
Another common home cost is private mortgage insurance, or PMI. This PMI is a policy that, as a homebuyer, you pay for, but it protects your lender in case you default. Homebuyers who don’t put at least 20 percent down when they purchase a residence usually have to buy PMI. And some of those folks now can deduct that cost.
Property tax additions
Many homeowners itemize because they have substantial enough mortgage interest and property tax amounts to exceed their standard deduction amount. But in some cases, such effort isn’t worth it.
Standard deduction amounts have increased over the last few years as part of tax-law changes. Those figures then are bumped up each year to reflect inflation. That means that some homeowners, such as longtime residents who’ve paid down their loan and don’t have much in the way of mortgage interest anymore, don’t have enough expenses to itemize.
- Property tax additions.
- Making your PMI claim.
- Time and residence restrictions.
- PMI refinancing rules.
- Income phaseouts.
Because it isn’t worthwhile to itemize, these folks then lose the tax break offered by their property taxes. Not anymore.
Now homeowners who claim the standard deduction can add at least some of their property tax payments to their tax return’s standard amount.
Single homeowners (which includes those who’ve never married, a married taxpayer filing separately, as well as heads of households) can add up to $500 of property tax payments to their standard deduction amounts. Married taxpayers who file a joint return can add up to $1,000 to their standard deduction.
To include the property tax amounts in your standard deduction, you’ll need to file Schedule L.
Making your PMI claim
For most property owners who pay PMI premiums, the insurance is simply part of the price of owning a home. But some homeowners who purchased their primary residences or second homes in 2009 can claim a tax deduction on PMI premiums.
This tax break was tucked into the Tax Relief and Health Care Act of 2006 and originally applied to policies on home loans taken out in 2007. As the housing market continued to sag, Congress extended this tax break to certain premiums paid through 2010.
The tax deduction can be taken for policies issued by private insurers as well as insurance provided by the Federal Housing Administration, the Department of Veterans Affairs and the Rural Housing Administration.
Claiming the deduction is easy. Most homeowners are already familiar with Schedule A, the form on which itemized expenses are claimed. The second section of that form, titled “Interest You Paid,” is where mortgage interest and loan points are claimed, specifically on line 13.
Your lender also helps out when it comes to reporting PMI amounts. In box 4 of your Form 1098 (or the substitute year-end loan information statement your lender uses), you’ll find the amount of PMI premiums you paid last year as part of your home payments.
Time and residence restrictions
While claiming the new PMI deduction is easy, there are some limits.
First, there’s the deduction time frame. It’s restricted to a few years. This tax-filing season, you can claim a deduction for PMI premiums only if you took out the mortgage on which you pay PMI on or after Jan. 1, 2007. If your home loan was issued before that date, none of your PMI payments are deductible.
If you get a new mortgage through 2010, any associated PMI premiums on that loan will be deductible in those tax years, or later if Congress extends the law beyond its current effective dates.
What about that second-home loan on which you pay PMI premiums? You might be able to deduct those, too, as long as you meet the requirements. Again, the loan on the second home must have been issued in 2007 or later to be deductible. Also, the second property must be for your personal use as a second or vacation residence. If you rent it out, then you could be stuck in some cases paying the PMI without any help from the IRS, unless you claim tax breaks on the home as rental property.
PMI refinancing rules
PMI on loans refinanced in 2009 might be deductible, but only up to the property’s acquisition loan amount.
For example, you bought a house five years ago for $150,000 using an 80-20 piggyback loan arrangement of $120,000 and $15,000. Your home acquisition amount is $135,000.
In 2009, you refinanced the property, taking out a $140,000 loan that included a PMI policy. You can only deduct the PMI premiums for the loan amount up to $135,000, the amount of the mortgage when you acquired the home, not on the full new loan of $140,000.
Finally, while there is no limit on the amount of PMI premiums you can deduct, the amount might be reduced based on your income.
When adjusted gross income, or AGI (the amount shown on line 38 of Form 1040), hits more than $100,000 for single, head of household or married filing jointly taxpayers, or $50,000 for a married persons filing separate returns, the PMI deduction begins phasing out.
The deduction is reduced by 10 percent for each $1,000 over the AGI limit and disappears completely for most homeowners whose AGI is $109,000 or $54,500 for married filing separately taxpayers.
The Schedule A instructions include a work sheet, as does most tax preparation software, that affected homeowners can use to determine their reduced PMI deduction amount.