Understanding Loan Terms

Understanding Loan Terms

2016: The Year the Mortgage-Insurance Tax Deduction Is Set to Expire

by Gregory Hall

The mortgage-insurance tax deduction was set to expire at the end of 2015, but it was extended for another year. Many homeowners can reduce their taxable income for 2016 by including mortgage insurance as an itemized deduction.

The original impetus for the mortgage-insurance deduction was the economic downturn of 2006. The deduction was intended to help stimulate the sluggish real-estate market. At first glance, it's easy to assume that the deduction might apply to mortgage insurance on all home loans. However, it applies only to certain mortgage-insurance policies initiated after the beginning of the housing crisis.

The deduction is applicable to mortgage-insurance contracts taken out after 2006. The deduction may also apply to some refinanced mortgages if the insurance contract itself was issued after 2006. There are income restrictions on who is eligible to claim the mortgage-insurance deduction.

Income restrictions

There is a specific line entry on Form 1040 referred to as adjusted gross income, or AGI. If your AGI is over $100,000, your mortgage-insurance deduction is partially or completely phased out. The deduction is reduced by 10 percent for each $1,000 increment by which your AGI exceeds $100,000. A final increment of less than $1,000 also causes a 10 percent reduction, so the deduction is completely eliminated if your AGI is above $109,000.

The instructions for IRS Schedule A contains a worksheet for calculating the mortgage-insurance deduction. Schedule A is the form used to itemize deductions. For the filing status of married filing separately, the mortgage-insurance deduction is completely phased out if AGI is over $54,500.

Limit of two homes

The insurance deduction applies to mortgage insurance coverage for home-acquisition debt, which is defined as debt incurred to purchase either a first or a second home. Therefore, the qualifying mortgage insurance on two personal homes can usually be deducted. A rental property does not qualify, so you must personally use both homes to deduct the mortgage insurance on both.

Tax forms

At the end of each year, your mortgage company is likely to provide you with IRS Form 1098 for tax-preparation purposes. In addition to interest paid, the form contains a specific entry amount for mortgage insurance. Qualifying mortgage insurance is then entered on Schedule A of your income tax return as an itemized deduction.

Although set to expire at the end of 2016, the mortgage-insurance deduction might very well be extended again. Contact a mortgage professional such as Doolin Security Savings Bank for more information about real-estate tax deductions.


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Understanding Loan Terms

When I started my own company, I knew that I needed a little business capital and fast. In an effort to raise money, I worked with various lenders to discuss loans, financing, and special terms. Unfortunately, I quickly discovered that not every loan was created equally. Some loans had almost predatory terms like high interest rates and penalties, while others were completely fair. Fortunately, a business consultant of mine taught me about loans and financing, so that I could make better choices in the future. The information on this blog saved my business, and I know that it can help yours too.

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