Mortgage Insurance Premium – Tax Deductible?

Another great question from one of my readers: “My question is in regards to the Upfront Mortgage Insurance Premium that was charged on my HUD statement (line 905) on the house I closed on in February 2010. Is this amount tax deductible on my taxes in full this year? I have been told a few different stories about it and assume many others will have the same question. I know that I can deduct the premiums I paid throughout the year and they were on my 1098.”

The short answer is mostly yes.   Qualified Mortgage Insurance can be included with regular home mortgage insurance on schedule A of the 1040 tax form.  If you do not itemize, you are out of luck for meeting the qualifications to take this deduction.

There are of course some other caveats introduced into the picture.

• Your Adjusted Gross Income (AGI) must be less than $100,000.
• The house in question must have been purchased after 2006.
• If you prepaid insurance in some way, the amount you can deduct needs to be allocated over several years.
• Mortgage Insurance is often called PMI.  However, the provider of your insurance may use a different name such as “Funding Fee” or “Guarantee Fee.”

It’s important to speak with a qualified tax preparer or CPA regarding questions specific to your situation.  There may be other issues in your case that would disallow this deduction.  It’s always a better idea to get professional advice rather than risk standing empty-handed in front of an auditor some day trying to claim ignorance.

The tax filing period is now on the home stretch.  If you have not yet filed or made an appointment to have your return completed, do it soon.  The closer you get to the due date, the more likely it is that your tax preparer will simply file an extension in your case.  This means any refunds you are owed will be delayed as well.

Beyond Yourself, Charitable Giving

So you’ve obliterated all your debt, paid off your credit cards diligently, established an emergency savings fund with 3 to 6 months of expenses in it, purchased the necessary insurance products, what’s next?  The normal attitude of a Western Society would be “let’s save up to buy something big.”  While it’s admirable to be actually saving up for a large purchase, perhaps there’s another option.  Everyone has seen the commercials late at night that show the starving kids of multiple ethnicities with the kindly old grandfather figure asking you to sacrifice a little bit.  Charitable giving is a great way to go beyond yourself and make a difference in the world.  There are as many charitable possibilities as there are causes in the world.  Some cater to animal lovers, feeding the hungry, promoting eduction or children issues, others to environmental causes, others still are religious in nature.  How do you know where to put your dollars to get the biggest bang for your buck?

First, some background.  Taxpayers can often deduct the value of charitable contributions on their tax returns in Schedule A.  This is subject to limits based on income and also assumes that the taxpayer already itemizes.  If you  take the standard deduction on your tax return, you will not see extra tax benefit from charitable contributions.

Contributions can be in the form of cash or property.  Donating used clothing and household items that are in good shape to your local Goodwill store is one way of making a non-cash contribution.  The IRS has guidance available to determine the value of the non-cash deductions.  Many people go even further by working charities into their estate plan to minimize taxes and provide a positive legacy at the end of their life.  Check with your CPA or tax preparer for specific guidance in your situation.

Suppose you want to donate cash directly to a charity.  Charitable organizations, like businesses need cash to operate.  A certain amount of the fund raising they do must cover operational expenses like salaries, marketing, supplies, rent and administration.  The key is to find charities that minimize these expenses as much as possible.  Larger charities are required to submit to the IRS a document with the number 990.  This document contains information on the structure of the charity.  It is also available for public review.

There are other ways to check up on the expense ratio of a charity.  Websites like Charity Navigator, Charity Guide,  The Better Business Bureau and GuideStar (requires registration) give many different ratings on program expense ratio as well as growth percentages and descriptions of the type of work the charity performs.  There are countless other websites and tools available to help you decide.  I found these through a simple search engine query.

Charitable giving lets you go beyond the normal selfish pursuits of society.  In this holiday season, perhaps it’s time to add a charity to your list of gift recipients.  You’ll be surprised to see how much good your donation can do.

S Corp Shareholder Health Benefits

Q. A 2% shareholder of an s corporation is also an emploeye.  The corporation offers health insurance under a premium only 125 cafeteria plan.  Is the shareholder/employee eligible to participate?  If so should the corporation’s contribution be reported as wages?

A. There are lots of good articles already on the web about 2% shareholders of S corporations. These would of course be secondary resources on the topic but they can provide coverage from the perspective of those who work in this field every day.

The key is that the IRS considers an S corp to be a partnership when dealing with employee fringe benefits.  If the company pays for the health insurance of a 2% shareholder, it is allowed to take a deduction for that benefit.  The full amount of that premium would be considered taxable income to the shareholder/employee.  So…yes, a shareholder can participate in the plan, but cannot get pre-tax treatment like the rest of the employees would under a section 125 or “cafeteria plan”.

Some states do not allow single person health plans to be purchased as a business.  If the 2% shareholder is the only shareholder in the S corp, then perhaps he should consider hiring his spouse to enable them to purchase a business plan.  Otherwise, health insurance must be purchased as an individual and can only be deducted once it passes 7.5% of AGI on the tax return if the individual itemizes.

The IRS published a bulletin about this topic that goes into much more detail.  It is IRB 2008-2 and can be found here.