When Is Mortgage Insurance Tax Deductible?

At any given time, the last year in which the tax deduction for private mortgage insurance (PMI)also known as Mortgage Insurance Premium (MIP), was permitted for the 2017 tax year, but only for mortgages taken out or refinanced after January 1, 2007.

However, the Supplemental Consolidated Credits Act of 2020 permitted MIP and PMI tax deductions for 2020 (and 2021) and retroactively for 2018 and 2019 if eligible taxpayers filed an amended federal income tax return. The itemized deduction for mortgage insurance premiums was extended to 2021, and filers were able to deduct on line 8d of Schedule A (Form 1040) amounts paid or accrued in 2021. It is not certain that you can deduct your PMI in 2022.

If certain conditions were met, mortgage default insurance premiums could be deducted as itemized deduction when you come back. If your adjusted gross income (AGI) is $109,000 or more for 2021, this deduction is not allowed. This also applies to married individuals filing separately, for whom the adjusted gross income limit is $54,500.

Key points to remember

  • You can deduct private mortgage insurance from your taxes if you meet specific conditions.
  • In 2019, Congress extended the MIP and PMI tax deductions for 2020 and 2021 (and beyond), plus retroactively for 2018 and 2019.
  • Private mortgage insurance is not necessary if you are buying a home with a down payment of 20% or more.
  • The mortgage relief deduction was introduced under the Tax Relief and Health Care Act in 2006.
  • Congress has voted a few times since then on deductions for private mortgage insurance.

PMI tax deduction: chronology of the legislation

The Tax Relief and Health Care Act first introduced the mortgage insurance deduction in 2006. In 2015, Congress extended the deduction with the Protecting Americans from Increased Taxes Act (PATH)but the deduction expired on December 31, 2016. The extension was only valid for one year.

Congress then intervened again. The 2018 bipartisan budget law extended the mortgage insurance premium deduction retroactively to 2017. On January 8, 2019, California Representative Julia Brownley introduced the Mortgage Insurance Tax Deduction Act of 2019, which would make the mortgage insurance deduction a permanent part of the tax code and apply retroactively to all amounts paid or accrued since December 31. 2017.

The Supplementary Consolidated Credits Act 2020 authorized PMI tax deductions for 2020 (and future tax years) and retroactively for 2018 and 2019.

How much could the PMI deduction save a taxpayer?

It depends on how much you owe and your tax bracket, but typically you’ll pay $50 a month in premiums for every $100,000 of financing. Keep in mind, however, that the down payment amount, loan type, and lender requirements can all affect your actual cost.

For example, if someone puts a 5% down payment on a $200,000 home, they will pay monthly PMI premiums of around $125. Increase your down payment to 10% and you’ll pay less than $80 a month.

So how does this affect your tax bill? Imagine that a person’s adjusted gross income is $100,000. You bought a house for $200,000, deposited 5% and paid $1,500 in PMI premiums ($125 times 12 months). The PMI deduction reduces your taxable income by $1,500. If you’re in the 12% tax bracket, you save $180 on your tax bill ($1,500 x 12%), and if you’re in the 22% tax bracket, you save $330 ($1,500 x 22%).

Better than a tax deduction, getting rid of the PMI altogether is even nicer. A homeowner can waive the PMI when they have 20% of the equity in your home.

Calculation example

You must allocate the insurance premiums the shorter of the stated term of the mortgage or 84 months from the month the insurance began. Say you take out a 15-year mortgage that starts in July of the current year. At the start of the loan, you prepay all of the mortgage insurance required for the term of the loan, in this case $8,600.

Deduction = ($8,600 / 84) x 6 months = $614.29

If your income is less than the maximum allowed, you can deduct the above amount for the year.

Origins of the mortgage insurance tax deduction

This tax deduction originated as part of the Tax Relief and Healthcare Act 2006 and was initially applied to private mortgage insurance policies issued in 2007.

In response to the slow recovery in the housing market, the Protecting Americans from the Tax Hikes Act of 2015 extended the deduction through 2016. The mortgage insurance deduction can be found on Schedule A of the tax returns at line 8d. The amount one entered in this section was found in box five of the Form 1098 sent by the lender.

Starting in 2021, if homeowners with PMI meet the eligibility requirements, they can still deduct it when filing a tax return.

What is private mortgage insurance?

Private mortgage insurance must be purchased when buying a home using less than 20% down payment. When you have 20% equity in the home, you can ask your mortgage lender to drop the insurance.

Can I deduct my PMI?

If you file your taxes for 2018, 2019, 2020, or 2021 and meet the eligibility requirements, you can deduct your PMI on your federal taxes.

How can I cancel my PMI?

Usually, you will need to hold your mortgage for 12 months with no missed payments and have 20% equity in the home before you can apply for your PMI to be waived. Most lenders will automatically lower your PMI once you reach 22% equity in your home.

The essential

As of August 2022, it is uncertain whether the deductions for private mortgage insurance will continue for the 2022 tax year. If you are filing your taxes for previous years, you may take advantage of your mortgage insurance deduction insurance or your mortgage premium insurance if you meet specific conditions. terms. However, the best way to avoid worrying about whether or not your PMI will be deductible in the future is to pay off your mortgage bill. Once you reach 20% Equity in your homeyou can ask your lender to remove your private mortgage insurance from your mortgage bill.