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If you have purchased a home in 2007, you may qualify for a new tax deduction. Many borrowers are required to purchase private mortgage insurance, or PMI, when they get a loan This insurance is required by the lender to assure that should the borrower default on the loan, and the lender has to sell the house to pay for the mortgage, that the difference in the selling price and the loan amount is covered by this insurance policy.. This makes the loan essentially no risk for the lender.
If you made less than a 20% down-payment on the house, the lender typically requires this insurance. As the borrower, you are required to pay this, usually as a monthly addition to your mortgage payment. The first year it is usually paid up front at the closing. The cost of this varies from .50% to .75% of the loan amount, depending on the type of loan and the risk associated with it. For example, if it costs .50% and the loan was for $400,000, you would have to pay about $800.00 a year.
On a side note, you can deduct sales tax you paid on a new vehicle, if you bought it between February 17 and December 31, 2009. This is sometimes called the new car tax deduction.
There was new tax legislation passed in 2007 that could make this deductible on your federal return. Now this does not apply to everyone as it is phased out for taxpayers with adjusted gross incomes exceeding $100,000 ($50,000, if married filing separately). If you make over $110,000 filing jointly, you can’t claim it at all.
Let’s see how much that will reduce your 2007 tax payment. If you are in the 25% tax bracket, this deduction could be worth about (.25 X $800) $200.00. That could be a good start on a Roth IRA. See my post 16 Roth IRA Facts.
Quote from the IRS website –
“You may be able to treat mortgage insurance premiums you paid during 2007 as home mortgage interest. The mortgage insurance must be paid in connection with home acquisition debt, the mortgage insurance contract must have been issued after 2006, and you must have paid the premiums before 2008 for coverage in effect during 2007. You can deduct mortgage insurance premiums on Schedule A (Form 1040), line 13.
Limit on deduction. If your 2007 adjusted gross income on Form 1040, line 38 is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. For more information, see Publication 936, Home Mortgage Interest Deduction“
I understand that some people are already getting confused about this, and they think that since they pay hazard insurance on the house, that it should be deductible as well. This is not the case. A typical homeowner’s insurance premium is not deductible. This new legislation applies only to PMI and only if the loan was made in 2007 or after.
We are not lawyers or tax authorities and we advise you, strongly, to consult your own tax professional, if you think this deduction applies to you.
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