The Internal Revenue Service provides two options for claiming deductions on your annual income tax return. Most people choose the standard deduction because it is easier to figure, and will often give them a greater deduction. Some people choose to itemize their deductions from an extensive list provided by the IRS. One of the major deductible items available to taxpayers is the interest on their home mortgage. Since mortgage payments may include principal, interest, property taxes and homeowner's insurance, it is fair to ask whether insurance is deductible on your tax return.
Homeowner's insurance is a specific type of insurance product that provides financial protection to the policy holder in the event of property damage to the home or personal injury than may occur on the property. This type of insurance typically covers damage due to natural forces such as wind, hail or fire. They provide legal liability and medical coverage for a slip-and-fall, dog bite or other injuries that occurs on your property. Homeowners may elect to also purchase flood insurance and earthquake insurance, which is usually not included in a standard homeowner's policy. Many mortgage companies require borrowers to keep adequate homeowner's insurance in place for the life of the mortgage. Payments for this type of insurance payment are usually not deductible on your income tax.
Mortgage insurance is a different kind of insurance policy that many mortgage companies require during the first several years of the mortgage contract. Mortgage insurance, which is sometimes referred to as private mortgage insurance, or PMI, does not cover the homeowner at all. It is a policy that protects the financial interests of the mortgage company in the event of a default by the homeowner. Premiums are usually included in the monthly payment. The requirement to maintain mortgage insurance usually ceases once the equity in the home reaches 20 to 25 percent. Mortgage insurance premiums paid after January 1, 2007 are deductible on IRS Form 1040, Schedule A.
An individual who maintains an office in her home for the convenience of her employer can deduct certain regular household expenses, including homeowner's insurance, provided she is not charging her employer rent for the space. The space claimed must be used regularly and exclusively for business. Insurance is considered to be an indirect expense, so it is not deductible in full. The amount of the deduction is based on the percentage of the home that is used as a home office, which is derived by dividing the square footage of the home office by the total square footage in the home. Multiple that percentage by the annual cost for homeowner's insurance to determine the total deduction.
Business Use of the Home
Business use of the home is similar to having a home office, but this applies to self-employed individuals rather than those who work for someone else. The method of figuring the amount of deduction for homeowner's insurance remains the same, but the method of reporting is different. Employees report their deductions on IRS Form 1040, Schedule A. Self-employed individuals report business use of their homes on IRS Form 1040, Schedule C.
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