Question 1:  I bought my main home in 2008 using a mortgage and I pay monthly premiums for mortgage insurance. Can I deduct these payments?

Answer:  In general, if you itemize deductions, you may deduct premiums paid for mortgage insurance provided by the Department of Veterans Affairs (VA), the Federal Housing Administration (FHA), the Rural Housing Service (Rural Housing), or private mortgage insurers in connection with a mortgage for the purchase of your main home. The amount you may deduct is limited if your adjusted gross income is more than $100,000 ($50,000 if married filing separately). No deduction is allowed if your adjusted gross income is more than $109,000 ($54,500 if married filing separately). See the instructions and worksheet for Schedule A, Line 13, to figure your deduction.

Box 4 of Form 1098 may show the total amount of premiums received from you in 2008. If you paid a lump-sum premium that pays for insurance for 2008 and later years, in most cases you must figure your deduction based only on the portion of the premium that pays for insurance for 2008. See Question 2 below if you paid a lump-sum premium that also covers years after 2008.

Question 2:  I paid a lump-sum premium in 2008 that also covers years after 2008.  How do I figure my deduction?

Answer:  If you paid a lump-sum premium for insurance provided by FHA or a private mortgage insurer that also covers years after 2008, you must determine the portion of the premium that pays for insurance for 2008 by dividing the total premium by the stated term (number of months) of your mortgage, or 84 months, whichever is shorter. Multiply that amount by the number of months during 2008 that your home was covered by the mortgage insurance. Enter the amount allocated to 2008 in the worksheet for Schedule A, Line 13, to figure your deduction for 2008. You figure your deduction in later years based on the amounts allocated to those years. If your mortgage is satisfied before the end of your allocation period, you cannot deduct the amounts that are allocated to periods after the mortgage is satisfied.
If you paid a lump-sum premium for insurance provided by VA or Rural Housing, commonly known as a funding fee and guaranty fee respectively, no allocation is necessary, and you figure your deduction for 2008 based on the full amount of the payment. Enter the full amount in the worksheet for Schedule A, Line 13, to figure your deduction.