When you have a mortgage, the IRS allows you to write off certain costs associated with that mortgage from your taxable income as a home mortgage interest deduction. You may claim several different costs such as your loan interest, points and late payment charges as home mortgage interest deductions. The only allowable deduction affected by income limits is the deduction for mortgage insurance premiums.
You may claim deductions for home mortgage interest if your mortgage is a secured debt on a qualified home in which you have an ownership interest. A secured debt allows your home to be used to pay off the mortgage loan in the event of default. A qualified home includes any property that has sleeping, cooking and toilet facilities such as a house, condo, mobile home or boat. A home can be the one in which you live (your main home) or a second home provided you did not hold it for rent or resale during the year. If the second home was rented during the year, you must have lived in it for a minimum of 14 days or 10 percent of the days during which it was rented -- whichever is longer. Claim your deductions on Schedule A, form 1040, of your income tax return.
Mortgage Insurance Premiums
If your mortgage meets the qualifying rules for the home mortgage interest deduction, you may be able to claim premiums paid for qualified mortgage insurance. Qualified mortgage insurance includes insurance from the Department of Veterans Affairs, the Federal Housing Administration, the Rural Housing Service and Private Mortgage Insurance. The contracts must have been issued after 2006.
According to the IRS rules last reviewed in December 2012, you can claim the full amount you paid for mortgage insurance premiums if your adjusted gross income (AGI) on line 38 of form 1040 is $100,000 or less ($50,000 if married filing separately). If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. For AGI amounts between these figures, use the Mortgage Insurance Premiums Deduction Worksheet available in the instructions to Schedule A form 1040. Basically, you will be allowed a pro rata deduction of your mortgage insurance premiums after you have rounded up your AGI to the nearest $1,000.
If you prepaid your mortgage insurance, you cannot deduct the full amount in the year paid. You must allocate the premiums over a period equal to the shorter of 84 months of the entire mortgage term. You cannot receive credit for unallocated mortgage insurance premiums in the event that you pay off your mortgage early. These rules do not apply to mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service.
To write off your mortgage insurance premiums, your mortgage must satisfy the rules for a qualified mortgage. The mortgage must be a secured debt, in that the home could be used to pay off the mortgage loan in the event of a default. Furthermore, the debt must be secured by a qualified home, meaning any property you deem as your first or second home, and which has sleeping, cooking and toilet facilities.
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