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Bankrate's 2010 Tax Guide
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2 big homeownership expenses to deduct

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.

Income phaseouts

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.

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