Mortgage Insurance Tax Deductibility Dead On Capitol Hill For 2004
by Kenneth R. Harney
Forget about deducting mortgage insurance premiums on your federal taxes this year. Despite having passed the Senate and co-sponsorship by more than 220 House members, Congress did not include it in its massive, eleventh-hour tax legislation last week. Technically, Congress did not reject mortgage insurance deductibility per se; it simply did not include it in a conference committee bill meant to compromise differences between separate Senate-passed and House-passed tax bills. The omission probably forecloses any chance that Congress will take up deductibility again before the election, and before a new Congress comes to Capitol Hill next year. "We are disappointed," said Jeff Lubar, spokesman for the Mortgage Insurance Companies of America. "We hope the Congress will reconsider." The deductibility concept would have allowed as many as 12 million-plus American homeowners to take tax writeoffs they are currently denied. An estimated 5.5 million homeowners pay PMI (private mortgage insurance) premiums and 7 million-plus pay FHA (Federal Housing Administration) premiums as part of their monthly mortgage bills. The legislation would have also extended deductibility to VA (Veterans) and Rural Housing Service guaranteed loans. Had Congress included the mortgage insurance reform in its big corporate tax bill, it would have nullified a decades-old prohibition by the IRS against deducting any form of mortgage insurance premiums on federal tax filings. Though federal tax law permits writeoffs of mortgage interest payments on principal residences, the IRS defines insurance premiums as non-deductible "service" expenses. Tax lawyers, however, argue that PMI and FHA insurance premiums are the functional equivalent of interest rate add-ons. The IRS itself permits deductions of MI premiums when they are paid by the lender and rolled into the mortgage interest rate charged to the borrower. The two-year Capitol Hill campaign to enact deductibility had attracted strong bipartisan support, and pulled together a disparate coalition of organizations who represent lower and moderate income households, minority groups, financial services companies, unions, and consumer organizations. The coalition included big banks, the Teamsters, the National Taxpayers Union, Consumer Federation of America, Fraternal Order of Police, insurance companies, Latino and African-American community groups, and the American Federation of Teachers. Mortgage insurance -- whether private or federal -- is an important tool for many moderate income and minority households to purchase a first home. In 2001, for example, PMI covered over half of all new loans to African-American and Latino home buyers, and 54 percent of all mortgages extended to borrowers with incomes below the median for their area. FHA mortgage insurance also is used heavily by first time and minority purchasers. Mortgage insurance is virtually always required when a buyer puts less than 20 percent as the downpayment on a home. Some higher-income purchasers use PMI to enable them to buy bigger properties with relatively small downpayments. The companion House and Senate bills advocating mortgage insurance deductibility both proposed a "phase out concept to ensure that the lion's share of the tax writeoffs would go to moderate income home buyers, rather than to wealthier purchasers. The bills limited full deductibility of premiums to households with incomes below $100,000. Borrowers with incomes above $100,000 would lose 10 percent of their deductions for each $1,000 that their incomes exceeded $100,000. The outlook for next year: To paraphrase Arnold Schwarznegger, mortgage insurance deductibility will be back. | 
