House Bill Would Make Mortgage Insurance Tax-Deductible

By Kenneth R. Harney

Saturday, March 29, 2003; Page F03

The Capitol Hill campaign to make home-mortgage insurance premiums tax-deductible took a giant step last week with the introduction of a bipartisan bill co-sponsored by key members of the tax-writing House Committee on Ways and Means.

The bill (HR 1336) would affect the mortgages of more than 12 million American homeowners and reverse a decades-old Internal Revenue Service prohibition against write-offs of mortgage insurance payments. Co-sponsored by Reps. Paul Ryan (R-Wis.) and William J. Jefferson (D-La.), the bill would apply to home loans with private mortgage insurance, Federal Housing Administration insurance, veterans guaranty coverage and Rural Housing Service mortgages.

Besides the co-sponsorship of six other tax committee members, the measure has drawn endorsements from an unusual collection of 21 interest groups, ranging from the National Urban League to the National Conference of Black Mayors, the National Taxpayers Union, the National Education Association, the National League of Cities, the Consumer Federation of America and the Mortgage Bankers Association of America.

Minority-housing advocacy groups support the measure because mortgage insurance in its various forms covers an estimated 57 percent of all home purchase loans made to black and Hispanic borrowers. Consumer and union groups back the bill because it provides tax relief to middle-income borrowers, an estimated 54 percent of whom use private or government-backed insurance with their home purchases.

In a statement last week, Ryan said "the people who use mortgage insurance are policemen, firemen, teachers and veterans," yet under current IRS rules, "they cannot deduct the cost of these [premium] payments for federal tax purposes." Ryan estimated that his bill would also lower the after-tax costs of mortgages enough to enable 300,000 additional renters per year to buy a home.

Mortgage insurance, whether private or government-backed, allows borrowers to take out a home loan with a minimal down payment, frequently 3 percent or less. Private mortgage insurance is required by lenders on any loan where the down payment is lower than 20 percent. FHA mortgages are aimed at buyers who can afford even smaller down payments and may have imperfect credit histories. Most mortgage insurance premiums are paid monthly as add-ons to the principal, interest, insurance and tax escrows. They range in size from less than $50 a month to $150 or more, depending on the size of the mortgage and depth of the insurance coverage.

The premium payments are designed to reimburse lenders for the costs associated with borrower defaults or foreclosures. The payouts for mortgage insurance claims never go to the borrowers themselves, only to lenders after they submit claims. The IRS has prohibited tax deductions of mortgage insurance premiums by homeowners because it considers the premiums to be loan-related "service" expenditures, such as an appraisal or credit report, rather than an integral part of the cost of mortgage money, such as interest charges.

However, experts on private tax law argue that by all tests, mortgage insurance premiums function like interest payments, benefit the lender alone and should be tax-deductible. The new House bill contains an income "phaseout" provision that would limit most tax write-offs to borrowers with household incomes below $100,000. Borrowers below that threshold could deduct 100 percent of their monthly insurance premiums. Borrowers with incomes above $100,000 would lose 10 percent of their deduction for each $1,000 that their income exceeds $100,000. Married homeowners filing separately would have a $50,000 income threshold and would lose 10 percent of their deduction for each $500 their income exceeded $50,000.

An estimated 7 million-plus homeowners pay premiums on FHA-insured home loans. Another 5.5 million pay private mortgage insurance premiums. Presumably, not all would take advantage of the new tax-deductibility provision, either because their household incomes exceed the limit or more likely because they do not itemize on their tax returns. A family with a $150 monthly insurance premium would be eligible for a new deduction of $1,800 per year. A family paying $50 per month in premiums would get a $600 write-off.

What's the outlook for the bill, and when might homeowners get the green light to start taking deductions? The bipartisan backing of eight Ways and Means Committee members, including the third-ranking Republican, Rep. E. Clay Shaw Jr. of Florida, suggests there is serious interest in moving the bill this session.

As to timing, mortgage insurance premiums would become deductible as soon as the bill is signed into law. That means that if the bill were to pass the House and Senate later this year, premiums paid after the date of enactment would be deductible on the next federal tax return filed by homeowners -- next year for most taxpayers.

Kenneth R. Harney's e-mail address is kharney@winstarmail.com.