WASHINGTON — 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. M.I. premiums are charged by lenders when borrowers make less than a 20 percent down payment.
In one form or another, they are an integral part of all Federal Housing Administration, Department of Veterans Affairs and low-down-payment loans eligible for sale to investors Fannie Mae and Freddie Mac.
During the past year, 43 percent of all home purchases were made with down payments of 5 percent or less, according to analytics firm CoreLogic Inc., 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 anywhere from $100 to $200 or more a month.
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 lower, 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 current statutory authorization for this benefit to middle income owners expired yesterday. It will not be available for borrowers during 2017 and beyond unless reauthorized or given permanent authorization through congressional action.
There’s a possibility this could happen if — as expected — Congress responds to President-elect Donald J. Trump’s call for a major tax reform bill to be passed as early as possible in the new year. Trump did not specifically address M.I. premium deductions during his campaign, but they 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, already are working on crafting a tax bill that would reduce corporate income taxes and raise the standard deduction for individuals, among many other changes.
Given the M.I. 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 revenues, 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 M.I. industry officials 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 U.S. Mortgage Insurers, the trade group that represents mortgage insurers. “They’re moving in the right direction” and “there’s no disagreement about the fundamentals,” she said in an interview.
For years the industry has maintained that M.I. 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. M.I. 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 M.I. premium deduction works under current law, which likely 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 for single filers). If your income is $109,000 or less, you only get to deduct a portion of your premium payments using a phase-down schedule available from the IRS.
