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Pay less in taxes with this deduction for new homeowners

Whether you have someone file them for you or you do it every year on your own, the tax return process is something that most people don't particularly look forward to. There are plenty of other things you'd rather do, as it takes time and effort just gathering all your documents - never mind the computations and manual input. And if you itemize, tax preparation is a whole lot longer. It's part of the reason why the chore is put off until the last minute - sometimes literally!

However, there's some pretty good news to report on the tax filing front, as a highly popular deduction that was originally introduced in 2007 - and rescinded - is back. Taking advantage of it can help reduce your taxable income and potentially add to your refund.

If you're unfamiliar with the mortgage insurance premium deduction, here's a little bit more about its history and the finer details so you can determine if you're eligible:

What exactly is the mortgage insurance premium deduction?

Passed by Congress in 2007 and signed into law by then President George W. Bush shortly thereafter, the mortgage insurance premium deduction allows homeowners who have a mortgage insurance policy out on their home to use those funds as a tax write-off, thus reducing the cost of homeownership. Originally included in the Tax Relief and Health Care Act, this deduction has been extended several times by lawmakers over the years, largely because of its popularity and the fact that so many people have mortgage insurance, which is generally required for those with FHA loans or who make down payments that are below 20% of a property's purchase price.

Based on the most recent statistics available from the National Realtors Association, the current down payment average among first-time homebuyers is 7%. It's more than double that - 16% - for those who have bought residential real estate previously. In 2017, an estimated 2.2 million homeowners across the country took advantage of the mortgage insurance premium tax deduction, which has slashed an average of between $1,000 and $1,550 off their taxable income, according to estimates from U.S. Mortgage Insurers.

For whatever reason, lawmakers decided not to extend the deduction beyond 2017 when it came to a vote and has sat dormant since. However, thanks to its reintroduction by California Rep. Julia Brownley and enthusiastic support of legislators on both sides of the political aisle, the mortgage insurance premium deduction has returned - much to the delight of homeowners and housing authorities.

"Mortgage insurance has helped millions of middle income Americans become homeowners and for nearly 10 years, the tax deductibility of MI premiums has helped to reduce the cost of homeownership," USMI President and Executive Director Lindsey Johnson explained, shortly after the extension was made official. "In a bipartisan manner, our elected lawmakers in Congress demonstrated today their commitment toward helping low down payment first time homebuyers by keeping mortgage insurance tax deductible."

Cost of homeownership still an issue

Affordability of homes has been an ongoing problem for the past several years, largely due to the balance between supply and demand, as builders can't quite keep up with the pace at which people are buying. In December, for instance, purchase activity for existing homes rose 3.6%, according to NAR data. This contributed to the 14.6% dip in total housing inventory, which now stands at three months as of the end of December, at the current sales pace. Additionally, for the 94th month in a row, median existing-home prices across the U.S. climbed, with the typical property selling for $274,500.

Every extra dollar saved helps, and supporters of the mortgage insurance premium tax deduction are hopeful that its return will provide extra breathing room for new, repeat and would-be buyers.

How to determine if you're eligible

The mortgage insurance premium tax deduction is much like most others in the tax code - certain restrictions apply. It's designed for middle-class families, specifically those whose annual income before taxes is less than $100,000. Given the typical American household earns a yearly salary of $63,179, according to the latest figures published by the U.S. Census Bureau, the vast majority of homeowners in the U.S. should be able to take advantage of this deduction if they so choose. Roughly 40% of borrowers with mortgage insurance earn a salary of $75,000 or less, based on USMI calculations.

Another caveat of the mortgage insurance premium deduction when it comes to eligibility is when you actually first bought the house you currently reside in. Given the original deduction wasn't in the tax code until the late 2000s, the tax break only applies to those who applied and were approved for a home loan by Jan. 1, 2007 and afterward.

But let's say that you bought a house in 2018, which was one of the rare years in which the mortgage insurance premium deduction wasn't in effect. Does that mean you're out of luck? To the contrary. The IRS generally allows you to amend your tax return retroactively for the past three years that you filed. This means that you should be able to take advantage of it well after the fact. 

How you can go about claiming the deduction

Although tax filing is increasingly paperless, the same can't be said for forms - there are loads of them. To claim the mortgage insurance premium deduction, you'll need Form 1098. If you haven't already received this from your lender, be sure to ask them for it, as you'll need it to enter the appropriate data. As noted by The Balance, what you actually spent in mortgage insurance premiums can usually be found in Box 4 and reportable on line 13 of Schedule A. If you're doing your own tax preparation with a software program, be sure to itemize rather than using the standard deduction method.

As Tax Day fast approaches, you should consult a tax advisor for further information regarding the deductibility of the mortgage insurance premium.  Thus, ensuring you can take advantage of the deduction allowing you to fully realize the ongoing benefits that derive from your wise investment