Mortgage Insurance Premiums

An individual is allowed to claim an itemized deduction for the amount of qualified residence interest paid or accrued during the year. For this purpose, qualified residence interest means any interest paid or accrued during the taxable year on any acquisition indebtedness or any home equity indebtedness with respect to any qualified residence of the taxpayer. Acquisition indebtedness means any indebtedness which is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and is secured by such residence (or any refinancing of such indebtedness). The aggregate amount treated as acquisition indebtedness for any period may not exceed $1,000,000. Home equity indebtedness means any other indebtedness secured by a qualified residence that does not exceed the fair market value of the residence (reduced by the amount of acquisition indebtedness with respect to such residence). The aggregate amount treated as home equity indebtedness for any period may not exceed $100,000. Prepaid interest (“points”) paid by an individual with respect to acquisition indebtedness (but not to a refinancing) generally is deductible in the year paid.

Any person who in the course of a trade or business, receives during any calendar year $600 or more of interest from any individual, must report such receipts to the Internal Revenue Service and furnish the individual with a copy of such statement.

Description of Proposal

An individual would be allowed to claim an itemized deduction for the amount of qualified mortgage insurance premiums paid or accrued during the year. For this purpose, qualified mortgage insurance premiums would mean amounts paid for private mortgage insurance (PMI), Federal Housing Administration (FHA) mortgage insurance, Veteran Affairs (VA) mortgage insurance, and Guaranteed Rural Housing (GRH) mortgage insurance with respect to acquisition indebtedness (or any refinancing of such indebtedness). The deduction would not be allowed with respect to any mortgage insurance paid with respect to home equity indebtedness. The deduction would be allowed for purposes of the alternative minimum tax.

PMI and FHA programs generally require monthly or annual periodic insurance premium payments. The FHA program also has an up-front fee. The VA and GRH programs have only up-front fees. With respect to PMI, the deduction would be allowed for the periodic mortgage insurance premiums made during the taxable year. If an individual makes an up-front payment of his or her PMI premiums, such amount would be amortized and deducted over the term of the mortgage. With respect to FHA insurance, the deduction would be allowed for the periodic mortgage insurance premiums made during the taxable year and the amortized portion (over the term of the mortgage) of any up-front fee paid at the origination of the mortgage. At the time a mortgage is repaid (either through refinancing or through repayment of the balance) any unamortized portion of the up-front PMI or FHA payment would not be deductible. With respect to VA and GRH insurance, the deduction would be allowed for the up-front fee paid at the origination of the mortgage in the year such fee is paid or accrued.

The deduction would be allowed in full if the taxpayer has adjusted gross income (AGI) of $100,000 ($50,000 in the case of a taxpayer filing married separately) or less during the taxable year the deduction is to be claimed. The deduction would be phased-out, in 10 percentage point increments for each $1,000 or fraction thereof ($500 or fraction there of in the case of a taxpayer filing married separately) that the taxpayer’s AGI exceeds $100,000 ($50,000 in the case of a taxpayer filing married separately).

The Secretary of the Treasury would be authorized to issue regulations that would require persons who receive qualified mortgage insurance premiums to make a return reporting the amount of such receipts to the Internal Revenue Service and the person making such payments. It is intended that such reporting be done by the person who receives the premiums from the homeowner (i.e., generally, the lender or person servicing the mortgage). The return shall be in such form, be due, and set forth such information as the Secretary may require. Reporting shall not be required until such regulations are finalized.