For millions of moderate-income home buyers, there’s an important money-saving question looming in 2017: Will Congress reinstate deductions for mortgage insurance premiums as part of its overhaul of the federal tax code?
Depending on your situation as a buyer or owner, it could mean thousands of dollars in tax write-offs. Mortgage insurance premiums are charged by lenders when borrowers make a down payment of less than 20 percent. In one form or another, they are an integral part of all Federal Housing Administration, Veterans Affairs and low-down-payment loans eligible for sale to investors Fannie Mae and Freddie Mac. According to the analytics firm CoreLogic, 43 percent of all home purchases in the past year were made with down payments of 5 percent or less, often by millennials, first-timers and minority buyers.
The insurance premiums compensate lenders and bond investors for the added risks associated with small down payments, and they often range from $100 to $200 a month, sometimes more. Under current law, these premium charges can be deducted on eligible borrowers’ income tax filings, along with mortgage interest. During 2014, the most recent year for which the Internal Revenue Service has statistics, mortgage insurance premium deductions were claimed by 4.2 million homeowners. Since the right to take full premium write-offs is restricted by law to borrowers with incomes of $100,000 or less, the benefit is targeted at non-wealthy families and is off-limits to everybody else. Roughly 40 percent of all taxpayers who filed for the deduction in the latest year had incomes of less than $75,000.
But here’s the problem: The authorization for this benefit to middle-income owners expired on Dec. 31, 2016. As a result, it will not be available for borrowers during 2017 and beyond unless reauthorized through congressional action.
This could happen if, as expected, Congress responds to President-elect Donald Trump’s call for a major tax bill to be passed as early as possible in the new year. Trump did not specifically address mortgage insurance premium deductions during his campaign, but these deductions clearly support one of his key priorities: greater recognition of the financial needs of blue-collar and middle-income families.
Republicans on Capitol Hill, who control the tax-writing committees, are working to craft a bill that would reduce corporate income taxes and raise the standard deduction for individuals, among many other changes. Given the mortgage insurance premium deduction’s congruity with key Trump themes, there appears to be a chance that a reauthorization could be included. There would be a cost in terms of federal revenue, however. The congressional Joint Committee on Taxation has estimated revenue losses to the Treasury of $2.3 billion for a two-year extension, or $1.15 billion per year.
That may sound like a large number, and indeed some Republicans are likely to find any revenue-loss item objectionable. But officials in the mortgage insurance industry say conversations with key tax writers and committee staff have been trending positive on the idea of continuing this popular benefit.
“I’m optimistic,” said Lindsey Johnson, president and executive director of USMI, the trade group that represents mortgage insurers. “They’re moving in the right direction” and “there’s no disagreement about the fundamentals,” she told me in an interview. For years the industry has maintained that mortgage insurance premiums are the functional and economic equivalent of mortgage interest — essentially compensation for the use of money — and therefore should be treated in the same way by the tax code. Mortgage insurance premiums fit the definition of “interest” in that they are solely charged for the use of the lender’s money and vary in amount based on the perceived risk of the loan transaction to the creditor.
Here’s a quick review on how the mortgage insurance premium deduction works under current law, which probably won’t change if it’s reauthorized: You can write off 100 percent of your premium payments each year if your adjusted gross income is $100,000 or less ($50,000 or less for single filers). If your income is $109,000 or less, you get to deduct only a portion of your premium payments using a phase-down schedule available from the IRS.
So what are the odds that buyers will get to write off premiums in the new year? It’s still too early to handicap: We have not seen the Republican tax bill yet. But given the election results and the priorities of the new administration, it could happen.
Ken Harney’s email address is firstname.lastname@example.org.