Tax questions...

[humandraydel]

I bought a house last year, so this is the first year I will itemize and I have a couple of questions. I get to deduct state income tax from my federal taxable income, right? The instructions say I should NOT reduce my "state income tax deduction" by any expected state refund. So, I'm guessing that means next year I have to include my state income tax refund as taxable income? I've always wondered about that - otherwise, doing federal and state taxes would become an iterative process which would be very annoying.

Second question: I paid a lump sum PMI when I bought the house. Can I deduct ALL of the PMI this year? In IRS documents it says that if you "prepay" PMI, then you have to divide the amount over 84 months. I'm not sure whether lump sum PMI is considered "prepaid"?

Also, please don't tell me to buy Turbo Tax or go to an accountant. I want to do (and understand) my own taxes, because I think understanding tax law helps in making financial decisions.

[creditcardfree]

Yes, you will recieve a 1099-G next year indicating your state income tax return and will need to include it as income next year.

I'm not familiar with current PMI rules.

I think it's great you are learning how to do your taxes. Good luck!

[nck4857]

Look as if you divide the lump sum of the PMI by the length of the loan or 84 months, whichever is shorter. Read here for some more info, straight from the IRS.

Premiums for Mortgage Insurance May Be Deductible

[MonkeyMama]

Yes, you will recieve a 1099-G next year indicating your state income tax return and will need to include it as income next year.

I'm not familiar with current PMI rules.

I think it's great you are learning how to do your taxes. Good luck!

Agreed with all of the above.

[MonkeyMama]

Yes, I am a tax accountant but I've never had a client who had (deductible) PMI, so not familiar with these rules at all.

Per IRS:

Publication 936 (2011), Home Mortgage Interest Deduction

Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. If provided by the Rural Housing Service, it is commonly known as a guarantee fee. The funding fee and guarantee fee can either be included in the amount of the loan or paid in full at the time of closing. These fees can be deducted fully in 2011 if the mortgage insurance contract was issued in 2011. Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098.

Special rules for prepaid mortgage insurance. Generally, if you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service.

Example.

Ryan purchased a home in May of 2010 and financed the home with a 15-year mortgage. Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Since the $9,240 in private mortgage insurance is allocable to periods after 2010, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. Ryan's adjusted gross income (AGI) for 2010 is $76,000. Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2010. For 2011, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less.

In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months).

Limit on deduction. If your 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.