Is FHA Insurance Deductible?
It is common knowledge that interest paid on a mortgage on a personal residence is deductible, along with real estate taxes, but not everyone is aware that mortgage insurance can be tax deductible as well. Both upfront mortgage insurance, such as that charged on an FHA mortgage, and monthly mortgage insurance is generally eligible for a deduction.
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Function
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According to the Internal Revenue Service, only mortgage insurance issued on first or second homes after 2006 is eligible. It is like a mortgage interest deduction in that you subtract it from your gross income, which reduces your tax liability. If you have an adjusted gross income of over $100,000 ($50,000 for married filing separately), your ability to take this deduction is affected and stops completely for incomes over $109,000 ($54,000 married filing separately). Instructions on how to determine if you qualify for the deduction are included in the Schedule A instructions for Form 1040.
Types
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The type of mortgage insurance premium you can deduct is not limited to government-backed mortgages such as the FHA mortgage insurance premium, VA funding fees and USDA Rural Development loans. Private mortgage insurance premiums are deductible as well. You can check with the IRS if you are in doubt as to whether your mortgage insurance qualifies if it does not fit in any of these categories.
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Identification
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For monthly mortgage insurance, you take a deduction for the year in which you pay it. Your lender will send you a 1098 form that states how much interest you paid for that year. Box 4 contains the amount of mortgage insurance you paid that year. You enter that total on Form 1040 (Schedule A)-Itemized Deductions.
Considerations
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For mortgage insurance paid upfront at closing, you must divide the lump sum payment by either 84 months or the term of the loan, whichever is less. Multiply that amount by the number of months your home was covered in that year. You can deduct this amount for your upfront mortgage insurance, even if you finance it as part of an FHA loan. This rule applies to all mortgage insurance except for VA loan funding fees and USDA Rural Development loan guaranty fees. The upfront mortgage insurance on those loans can be deducted in its entirety in the year the loan is originated.
Warning
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If you refinance your mortgage or sell your home, the IRS does not allow you to deduct mortgage insurance on any unamortized portions. You may be able to continue to deduct mortgage insurance on the refinanced loan if your new loan also requires mortgage insurance. Once you have 20 to 22 percent equity in your home and your mortgage insurance is canceled, your deduction stops.
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References
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