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.