Mortgage lenders are happiest when you put down at at least 20 percent of the purchase price at closing. Less than that and you usually have to pay mortgage insurance. That protects the lender against loss if you walk away from your debts. Like mortgage interest, the insurance is a tax write-off, but not always in the year you pay the premiums.
When you pay a monthly premium for mortgage insurance, you deduct your total insurance payments for the year on the year's taxes. If, say, you close this year and pay off all the premiums for the year at closing, those are deductible this year. If you pay a premium for the entire policy at closing, for example if you pay an upfront mortgage insurance premium through the FHA, you deduct it gradually over 84 months -- seven years -- or the life of the mortgage, whichever is shorter.
Taking It Off
Suppose you close in August on a 20-year FHA mortgage and pay an upfront mortgage insurance premium of $8,400 premium at closing, which covers the life of the loan. That translates into a $100 deduction for each of the 84 months of the write-off period. In the year you close, you can claim five months' worth of payments, for August through December, a $500 write-off. You can also write off five months' worth of your regular monthly mortgage insurance payments. Insurance you buy through the Department of Veterans Affairs or the Rural Housing Service is an exception: you can claim the entire payment the year of closing.
Adjusted Gross Income
If you report an adjusted gross income greater than $100,000 this year, your premium deduction shrinks. For every $1,000 above $100,000 you lose 10 percent of the write-off; above $109,000 it goes away completely. If your AGI doesn't fall exactly on a round number -- $101,275, say -- you round up. For couples who are married but filing separately, the reductions start above $50,000, and $54,500 cancels the deduction.
If you pay more than $600 in mortgage interest this year, your lender sends you a 1098 form showing the total interest. The form also shows how much you paid in mortgage premiums. To take the write-off for the premiums, report them on line 13 of Schedule A, the form for claiming itemized deductions. If you take the standardized deduction instead of itemizing, you can't deduct any premiums.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.