By Earnest Young
Before Congress went on recess for the holidays, it passed a new tax break for middle-income taxpayers who plan to purchase a home in 2007. The tax break, neatly sandwiched in an omnibus tax bill, allow new homeowners to claim a deduction on their mortgage insurance premiums.
Many home buyers cannot afford to make an initial down-payment of 20% of their home value and are thus subject to paying home owners mortgage insurance, an insurance designed to protect banks from home owners that may default on their payments. Mortgage insurance is estimated to be about $75.00 a month on a $180,000 home, or just about 1% of the mortgage.
The Mortgage Insurance Companies of America, a trade group for private mortgage insurers, estimates that the tax deduction will save homeowners approximately $300 to $500 a year on taxes. There are some caveats, however:
For one, the deductions will expire at the end of 2007 unless congress is pressured to extend it, which is very likely. In addition, only homeowners with adjusted gross income of $100,000 (middle-income taxpayers) or less qualifies for the deduction. Moreover, if you are paying homeowners insurance on an existing home you probably will not qualify for the tax deduction. It remains available explicitly for new home mortgages issues after December 31.
Home owners who refinanced their mortgages after December 31 are also qualified for this tax deduction in so far as the amount being refinanced exceeds not the amount of the original loan, states Jeff Lubar, of Mortgage Insurance Companies of America.
Tax deduction on mortgage increase was not the only tax break that Congress enacted before taking a holiday recess.
Teacher’s classroom expenses tax deduction was extended allowing teachers and others in the education arena to deduction up to $250 in classroom expenses that they purchase with their personal cash. The CCH reports that over 3 million taxpayers claimed the deduction in 2005.
Deduction for state and local taxes, which expired in 2005, was resuscitated until 2007. This gives taxpayers the option to deduct sales taxes instead of state income taxes on their federal returns. This, however, is more frequently used by taxpayers in states with no income tax.
With tuition cost rising higher than inflation, it was indeed good news for many students for Congress to extend a deduction of up to $4000 for college tuition, books and related cost. To qualify for the full tax deduction single taxpayers must have an adjusted gross income of up to $65,000 and married couples with an adjusted gross income of $130,000 or less. Single taxpayers with an adjusted gross income of $80,000 or less and married taxpayers with an adjusted gross income up to $160,000 can deduct up to $2000.