== 1/29/2007 -Update - "An
Update on PMI Tax Deductions" ==
It has not been widely reported, but late in the closing session of the 109th
Congress which adjourned this past weekend may have been a bit of good news
for homeowners.
In a last minute flurry of votes Congress approved the Tax Relief and Health
Care Act of 2006. As has been widely reported, the act was a mare's nest of
"earmarks," amendments, and attachments among which were extensions to a number
of earlier tax breaks that were due to or had already expired.
Most of these were designed for the benefit of businesses small and large but
the bill also included trade protection legislation and new laws relating to
health care.
Buried deep within the Act at Section 419 was a one page attachment
entitled "Premiums for Mortgage Insurance." Tracking Congressional
legislation requires more than a helicopter and a pack of search dogs. While
there are a number of web sites - some government sponsored others operated
by brave private individuals and organizations - following a bill from introduction
to enactment is a morass. We can, after six hours on line guarantee nothing
about what is to follow except the following.
The original legislation was introduced in the House in 2005 by Congresspersons
Paul Ryan (D-WI), William J. Jefferson (D-LA), and Eric Cantor (R-VA) as HR
3098 and in the Senate by Senators Gordon Smith (R-OR) and Blanche Lincoln (D,
AR) as S 132.
The Tax Relief and Health Care Act of 2006 as presented to the House contained
the following wording, very similar to that in the above referenced bills as
Section 419:
Section 6050H of the Internal Revenue Code of 1986 (relating to mortgage
interest) is amended by adding at the end the following new subsection:
In general.--Premiums paid or accrued for qualified mortgage insurance
by a taxpayer during the taxable year in connection with acquisition indebtedness
with respect to a qualified residence of the taxpayer shall be treated for purposes
of this section as interest which is qualified residence interest.
The Tax Relief and Health Care Act of 2006 was, by media accounts, passed by
both the House and the Senate but has not yet been signed by President Bush.
Beyond that, even The Congressional Record as of Dec. 12 could not provide
definitive information as to the final form of the bill as it was passed but
all indications are that the PMI amendment was included.
Basically this means that those homeowners who put down less than 20 percent
of the purchase price in securing a mortgage can now deduct the cost of the
private mortgage insurance (PMI) they were required to purchase to protect their
mortgage lender in the event of default. This amount can now be treated as mortgage
interest by itemizers when filing Schedule A of the federal tax return.
With monthly PMI payments tending to run in the vicinity of $100 or more per
month this will be bit of a help to homeowners who are using all of their interest
rate deduction but still owing income taxes. There was a cap in the original
legislation in which the amount that could be written off begins to decline
incrementally when income reaches $100K, but this seems to
have disappeared in the final bill.
This is good news for many taxpayers but the legislation was, of course, designed
more to benefit private mortgage insurers which have been lobbying
for such a change for some time. Once home buyers and loan officers caught on
to a little wrinkle that allowed buyers to avoid PMI by using blended or piggy-back
mortgages the use of PMI and thus the profits of the companies that write
it plummeted. Blended mortgages allowed borrowers without a 20 percent down
payment to take out a home equity line or a traditional second mortgage simultaneous
with a first mortgage to provide the necessary down payment. This form of financing
has a number of benefits (Check the archives on this site for several articles
on PMI in August and September 2005) but one of them was that the interest on
the junior mortgage payments (with some limits) was deductible.
Passing such a bill does not mean that everything will proceed as written.
The IRS will issue regulations interpreting the act and hopefully this will
be done in time for the April 15 filing deadline. If you are responsible for
paying PMI make sure that your tax professional is aware of
this new legislation and understands how it may result in a slightly lower price
tag on the bottom line of your 1040.
== 1/29/2007 -Update - "An
Update on PMI Tax Deductions" ==