Foreclosure tax change could benefit PMI payers

When they file their 2007 returns next year, some homeowners will be able to deduct their private mortgage insurance (PMI) payments.

And if the proposal to provide tax relief to folks who lose their homes to foreclosure is enacted, PMI payers could get a continued break, too.

PMI is insurance that lenders typically require from home buyers whose mortgage loans are more than 80 percent of their home’s value. In other words, if you put less than 20 percent down, part of your monthly payment will include a PMI premium.

The Federal Reserve Bank of San Francisco takes a thorough look at PMI on this special Web page.

While homeowners can deduct many of their residence-associated costs (as detailed in this story), PMI is not usually one of them.

Permissible PMI deduction: But thanks to a law that took effect at the end of 2006, this added insurance payment could provide some homeowners with a little bit more of a tax break on their 2007 returns.

Of course, to get this tax break, a homeowner has to meet some requirements.

There is, as you would suspect, an earnings eligibility amount. The ever budget conscious Congress … sorry, something caught in my throat there for a minute … crunched the numbers so that the U.S. Treasury wouldn’t lose too much.

The result: The full PMI break goes only to filers with adjusted gross incomes of $100,000 or less. A reduced deduction is available if you make between $100,001 and $109,000.

More critical are the calendar numbers. The PMI write-off, as originally enacted, is a one-year-only deal.

That means that the premiums are tax deductible as an itemized expense for PMI policies issued this year in connection with homes purchased this year, i.e., from Jan. 1, 2007, to Dec. 31, 2007. You could be making $90,000 and paying PMI this year, but if you bought your home in December 2006, you don’t get this tax break.

And even if you did buy your PMI covered home in 2007 and meet the earnings threshold, the law is set to expire this Dec. 31. Unless …

Yes, you got it. Congress is looking to extend the PMI deduction.

The foreclosure/PMI connection: The Mortgage Forgiveness Debt Relief Act of 2007, which I blogged about here when it was first considered by the Ways and Means Committee, now has been overwhelmingly approved by the full House of Representatives.

This bill, H.R. 3648, would get foreclosed-upon homeowners off the hook for taxes on debt forgiven during that process.

And one of the provisions in H.R. 3648 would continue the PMI deduction.

The extension still wouldn’t help folks who bought houses pre-2007, but it would give folks who are currently eligible for the PMI deduction the chance to keep claiming the tax break though 2014. It also would apply to new mortgages with PMI payments that were issued between Jan. 1, 2007 and Dec. 31, 2014.

The bill now awaits Senate action; it’s pending in the Senate Finance Committee. But if it passes on that side of Capitol Hill, the White House has indicated that Dubya will sign it into law.