Dear Tax Talk,

I am receiving money from my mortgage lender as part of a job loss mortgage protection insurance program. Are these payments taxable and if so, how would I report them?

-- Karen

Dear Karen,

I'm sure you had enough bad news when you lost your job. However, more bad news is that the mortgage assistance payments are considered other income by the Internal Revenue Service. The good news is that you can still deduct your mortgage interest as long as you itemize your deductions on Schedule A.

According to IRS Publication 525, if you receive benefits under a credit card disability or unemployment insurance plan, the benefits are taxable to you. These plans make the minimum monthly payment on your credit card account if you cannot make the payment due to injury, illness, disability or unemployment. Report on Form 1040, line 21, the amount of benefits you received during the year that is more than the amount of the premiums you paid during the year.

I don't see that there would be any distinction between credit card and mortgage insurance that would change the tax consequences. However, unlike credit cards, the interest on your mortgage is tax deductible.

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