Homeowners received two little-noticed gifts from the fiscal cliff deal signed by President Obama on Jan. 1. That congressional agreement, called the American Taxpayer Relief Act of 2012, restores a pair of treasured tax breaks previously lost to homeowners.
One is the federal tax deduction for mortgage insurance premiums. The other is a tax credit that lets homeowners take up to $500 off their federal income tax for making certain improvements that increase the energy efficiency of their homes.
Bloomberg makes the point that restoring these tax perks was a triumph for the extremely powerful housing and mortgage insurance lobbies. These two breaks, together with decisions to preserve tax exemptions for home sale profits and mortgage debt forgiven in foreclosures and short sales, could total $600 billion over the next five years.
Deduct MI premiums again
If you pay mortgage insurance, you know that deducting it is the next best thing after being able to cancel it (when the loan balance drops below 78% of the home's value and you've made at least 60 payments). Congress snatched away the deduction at the end of 2011 but gave it back with the stroke of a pen in the Jan. 1, 2013, deal.
You can use the deduction on your 2012 and 2013 federal taxes. It applies to private mortgage insurance premiums as well as Federal Housing Authority and Veterans Affairs premiums.
Restoring the deduction for those two years will cost taxpayers $1.3 billion, says The Associated Press.
Bloomberg says about 3.6 million taxpayers used the deduction in 2009 (the latest data available). "They deducted almost $5.5 billion in premiums, for a total tax benefit of more than $700 million, according to the National Association of Homebuilders in Washington."
To enjoy this restored benefit, you'll have to itemize deductions on your federal income tax, said MSN Money tax expert Jeff Schnepper, reached by email. "That means, assuming you don't take the standard deduction, your maximum benefit is 25% of whatever you pay in mortgage insurance premiums."
The deduction is for taxpayers earning less than $110,000 a year, says Mortgage Insurance Companies of America, a trade group.
FHA rules about to change
Government's and lenders' rules require mortgage insurance for homes bought with a down payment of less than than 20%. MICA, the trade group, says that roughly 29% of home loans have mortgage insurance. Of that, 9% is private mortgage insurance, 13% is FHA mortgage insurance and 7% VA coverage.
Heads-up: Buying an FHA-insured home is about to become more costly, by the way. Not only are FHA premiums rising to replenish the insufficient FHA insurance pool but FHA is putting an end to homeowners' ability to cancel their insurance once they have a 78% stake in the home.
No date has been set for the change, HUD spokesman Lemar Wooley said by email. He expects an announcement by March 31 or sooner. Once the change goes into effect, you'll pay mortgage insurance on an FHA loan for as long as you own the loan. The change does not affect FHA loans made before then, though.
Credit for green improvements
And now for that tax credit on energy-frugal improvements. A credit -- unlike a tax deduction, which lowers your taxable income -- is simply money taken off the amount you owe the IRS.
Residential energy tax credits have been available for several years for improvements and appliances that improve a home's energy efficiency. (The program has a tortured history. See it here at the Alliance to Save Energy.)
The tax credit is typically 10% -- up to a total of $500 -- for purchasing and installing certain products. But a few eligible products have specific credits, $300 for an electric heat pump water heater, for example.
The credit can be used when you purchase a qualified new water heater, furnace, boiler, heat pump, central air conditioner, insulation, windows or roofing for your home. Circulating fans are eligible when they're used in a qualifying furnace. Biomass stoves that use qualified fuel also are eligible.
As you may have noticed, "eligible" is the important word here. The Alliance to Save Energy explains how to find out which appliances are eligible. The Database for State Incentives for Renewables & Efficiency also offers a rundown of the credit.
You claim the credit for the tax year in which the appliance was installed (not purchased). You can use the tax credit only if you haven't claimed it before (in any year). File IRS Form 5695 along with your income tax to claim the credit. Here's how the IRS describes the credit.
Extending the credit for 2012 and 2013 will cost taxpayers $2.4 billion, according to the AP.