The FHA mortgage insurance premium–MIP–is an upfront insurance premium required on all FHA-insured mortgages. Beginning in 2010 the premium is 2.25% of the loan amount. The FHA upfront insurance premium financed over the life of the mortgage and can be added into the loan. The MIP may or may not be tax-deductible, based on the conditions of the loan and borrower.
Identification
The FHA mortgage insurance plan lets home buyers to finance home purchases or refinance their current mortgage. FHA mortgages allow down payments or equity of as much as 3.5 percent. The FHA mortgage insurance premium will be 2.25 percent of this proposed loan amount. On a $200,000 loan, the FHA MIP will be $4,500. The MIP can be paid in cash by the borrower or rolled into the mortgage. Rolling the MIP into the mortgage doesn’t effect the tax deduction of the MIP.
Significance
The IRS allows the deduction of upfront FHA mortgage insurance premiums, but they need to be allocated over the time the insurance coverage is in effect. The IRS rules allow a mortgage insurance premium that has been paid up front to be taken as a deduction over a period of 84 months (7 years) or the term of this mortgage, whichever is shorter. The FHA doesn’t cover mortgages with terms less than 15 decades, or so the deduction can be obtained over 7 decades. If someone meets the other requirements for the deduction of this MIP, one-seventh of the total paid may be deducted annually for 7 years unless the home has been sold; in the point the deductions cease.
Limitations
To take the full deduction–one-seventh of this MIP–the homeowner must have an adjusted gross income of less than $100,000. The deduction is phased out for incomes up to $109,000, and no deduction is permitted for AGI over $109,000. A taxpayer’s AGI is recorded on line 38 of IRS Form 1040 after completing a tax return. If somebody is carrying the deduction over the allowed 7-year period and her income exceeds the AGI limits, she’ll no longer have the ability to take the deduction.
Factors
An FHA-insured mortgage also has an yearly insurance premium that’s contained in the monthly mortgage payment. This mortgage insurance premium is also deductible in the event the homeowner is beneath the AGI limits. The yearly insurance premium begins with the first mortgage payment, so the homeowner will need to add together the yearly mortgage premium in addition to the one-seventh of this MIP to get the entire tax deduction for FHA mortgage insurance.
Time Frame
The rules for the deduction of mortgage insurance premiums changed in 2006 and again in 2007, when rules were set in effect that conducted through 2010. IRS limits on various tax deductions change annually, so it is crucial to reassess the existing IRS rules regarding the deduction of FHA mortgage insurance premiums.