As far as the Internal Revenue Service is concerned, mortgage insurance counts towards your total amount of mortgage interest paid when filing your taxes. Provided you meet certain criteria, this additional deduction opportunity can can save you big bucks when tax time rolls around. This tax savings can relieve part of the sting from the fact that mortgage insurance is often required for new mortgages and refinances.
Determine the Deductible Amount
Each year your lender should send you a copy of Form 1098, Mortgage Interest Statement, listing the amount of mortgage insurance and mortgage interest you paid during the previous calendar year in Box 1. Keep a record of your payment history and compare it to Form 1098 to confirm the lender's listed amount is correct. You may not receive Form 1098 if your interest payments did not exceed $600 over the calendar year.
How to Deduct Your Mortgage Insurance Premium
List the amount of mortgage interest and mortgage insurance paid from Form 1098 on Line 10 of Form 1040, Schedule A. If your records show that you paid a different amount of total mortgage interest and mortgage insurance than listed on Form 1040, attach an explanatory statement and write "See Attached" next to Line 10. If you purchased a home with your spouse or significant other, you should each attach a statement explaining what percentage of the mortgage interest and mortgage insurance you are each paying, totaling 100 percent.
If you pre-pay some or all of your mortgage insurance, you cannot deduct the entire premium paid on your taxes. Instead, you must divide the full mortgage insurance premium by either the number of months remaining in your mortgage or by 84 months. Each year, you can deduct 12 months worth of mortgage insurance premium payments.
The IRS places some limits on the amount of mortgage interest and mortgage insurance you can deduct. As of 2010, you are limited to $1 million in mortgage debt or $500,000 in mortgage debt if you are married filing separately. You can only deduct the amount of interest and mortgage insurance paid on this portion of your mortgage if the mortgage exceeds this limit.
While the Federal Housing Administration and most private lenders refer to it as a mortgage insurance premium, other lenders refer to this insurance payment by different names. For example, the Department of Veteran Affairs calls it a funding fee and the Rural Housing Service calls it a guarantee fee.