Deductibility of Upfront Mortgage Insurance

Well, was this an FHA or VA loan? I think the VA loans are deductible up front. And there are advantages to the FHA loans or rural .... loans.

The deduction is taken on Schedule A, the total of which can be partially phased out with high AGI. Phase out is not specific to mortgage insurance, which has no AGI limit.

Otherwise the prepaid mortgage insurance can be deducted ratably over the life of the mortgage or 84 months, whichever is shorter.

Check out the instructions for form 1040 Schedule A concerning prepaid mortgage insurance.

Here's the wording from IRS Pub 936:

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, be- ginning 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.

And... the wording on limits:

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. See Line 13 in the instructions for Schedule A (Form 1040) and complete the Qualified Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums.

The limits identified above are per each tax year. You can lose the deduction in one year and get it back the next year. There is no carryover of a lost deduction due to too high an AGI.

You stated you were in the 25% tax bracket. As such, you easily could be above the AGI limitation. Whether or not you have a cause of action against your lender will depend on state law and the facts and circumstances surrounding the terms of the loan and insurance.

Thanks Alan.

Is that AGI limit contained in the Schedule A instructions?

The single the 25% bracket is between taxable income of 33,950 and

82,250. But for married filers, as in the original post, it is between 67,900 and 137,050. So it's quite possible that the mortgage insurance will be phased out. It looks like the deduction is allowed under AMT.

Sorry to followup on myself, but I just looked and indeed it's there.

There's even a worksheet to let you work out how much is deductible.

Thanks.