In December we published an article about a provision in the Tax Relief and
Health Care Act of 2006 which was passed in the waning days of the 109th Congress
(December 12, PMI
Deduction Buried in the Closing Acts of Congress.) The bill, H.R. 6111 contained,
among dozens of other provisions and a boxcar of earmarks and pieces of pork,
a section that would provide some tax relief to homeowners who were obliged,
by virtue of down payments of less than 20 percent on their homes, to carry
private mortgage insurance (PMI.)
At that time the final version of the bill was not publicly available,
nor is it now, but here is an update and the news is not quite
as good for the taxpayer as it first appeared.
The House overwhelmingly approved H.R.
6111 on December 8 and the Senate passed corresponding legislation on December
9. The President signed the bill, probably on December 20, and it is now known
as Public Law Number 109-432. As of January 25 the Government Printing
Office had not produced a final printed copy of the bill.
At the time of our original article we noted that H.R. 6111 appeared to include
provisions from H.R. (which stands for House Resolution) 6408 and Senate 132.
At the time it was presented to the House in early December it contained the
following wording in 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.
We are relying on information on the law as signed by President Bush provided
by BNA Tax Management a tax advisory site. According
to BNA the following restrictions apply to what seemed like a general deduction
for homeowners for private mortgage insurance premiums. These may have come
about during conferences to resolve differences between House and Senate versions
or may have been earlier defined by Section 6050H of the IRS Code to which Section
419 was appended.
The Act defines qualified mortgage insurance as that provided
by the VA, the FHA, or the Rural Housing Administration or by private carriers
and specifies that it be treated as interest on a qualified residence. This,
however, is modified by the following "that premiums paid or accrued for
qualified mortgage insurance by a taxpayer during the taxable year in connection
with acquisition indebtedness." This is interpreted by BNA as meaning
that the deduction is only available to homeowners who assume PMI payments during
2007. In other words, you may not qualify for the deduction if you bought a
house subject to PMI in 2006 or earlier even though you are currently paying
premiums.
Deductions seem to be further limited to 2007 by the following: no benefit
will currently accrue to taxpayers for any amount paid or accrued beyond December
31 of this year "or properly allocable to any period after that date."
We are not lawyers or tax authorities and we advise you, strongly, to consult
your own tax professional, but it appears that this deduction is only
available to taxpayers during the current calendar year and that paying premiums
ahead as taxpayers are often advised to do with mortgage interest or property
taxes at year end when deductions are needed will not work in this situation.
As we stated in our earlier article, the original House and Senate legislation
was income-limited to $100,000 per household (or $50,000 for married homeowners
filing separately) ' a provision that appeared to disappear from the bill
that was finally voted on in December. BNA, however, states that this provision
did survive into the final version and that the allowable deduction for PMI
is phased out by 10 percent for each $1000 the taxpayers adjusted gross income
exceeds $100,000 (or every $500 above $50,000 for the married who file separately.)
This would mean that the deduction is not available for anyone with adjusted
income exceeding $110,000 or $55,000.
So, it appears that few homebuyers will be eligible to use this PMI
deduction and that it will only be available for 12 months. It seems
strange that Congress would pass such limited legislation and interpretations
could be different as corresponding IRS regulations are written. Still, if you
buy a house or refinance this year make a mental note to alert your
tax advisor to check on this small perk before you file for the tax
year ending December 31, 2007.