When Is Mortgage Insurance Tax Deductible?

Investing News

At one time, the last year that the tax deduction for private mortgage insurance (PMI), also known as mortgage insurance premium (MIP), was allowed was for the tax year 2017—but only for mortgages taken out or refinanced after Jan. 1, 2007.

However, The Further Consolidated Appropriations Act of 2020 allowed MIP and PMI tax deductions for 2020 (and 2021) and retroactively for 2018 and 2019 if qualified taxpayers filed an amended federal tax return. The itemized deduction for mortgage insurance premiums was extended through 2021, and tax filers were able to the deduction on line 8d of Schedule A (Form 1040) for amounts paid or accrued in 2021. It is uncertain if you will be able to deduct your PMI in 2022.

If specific requirements were met, mortgage insurance premiums could be deducted as an itemized deduction on your return. If your adjusted gross income (AGI) is $109,000 or more for 2021, this deduction is not allowed. This also holds true for married people filing separately, for whom the adjusted gross income limit is $54,500.

Key Takeaways

  • You may deduct private mortgage insurance from your taxes if you meet specific requirements.
  • In 2019, Congress extended MIP and PMI tax deductions for 2020 and 2021 (and beyond), plus retroactively for 2018 and 2019.
  • Private mortgage insurance isn’t necessary if you buy a house using a 20% or more downpayment.
  • The deduction for mortgage relief was introduced under the Tax Relief and Health Care Act in 2006.
  • Congress has voted a few times since then about deductions for private mortgage insurance.

PMI Tax Deduction: Legislation Timeline

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

Congress then stepped in again. The Bipartisan Budget Act of 2018 extended the mortgage insurance premiums deduction retroactively again through 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 would apply retroactively to all amounts paid or accrued since December 31, 2017.

The Further Consolidated Appropriations Act of 2020 allowed 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 a good rule of thumb is that you’ll pay $50 a month in premiums for every $100,000 of financing. Keep in mind, though, that the amount of the down payment, type of loan, and lender requirements can all affect your actual cost.

For example, if someone puts 5% down on a $200,000 house, they’ll pay monthly PMI premiums of about $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 someone’s adjusted gross income is $100,000. You bought a $200,000 house, put down 5%, and paid $1,500 in PMI premiums ($125 times 12 months). The deduction for PMI cuts 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%).

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

Example Calculation

You must allocate the insurance premiums over the shorter of the stated term of the mortgage or 84 months, beginning the month the insurance started. Suppose you take out a 15-year mortgage that begins in July of the current year. At the beginning of the loan, you prepay all of the required mortgage insurance 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 Mortgage Insurance Tax Deduction

This tax deduction originated as part of the Tax Relief and Health Care Act of 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 to 2016. The mortgage insurance deduction was found on Schedule A on tax returns on line 8d. The amount one entered in this section was found in box five of Form 1098 sent by the lender.

As of 2021, if homeowners with PMI meet eligibility requirements, they can still deduct them when filing a tax return.

What Is Private Mortgage Insurance?

Private mortgage insurance must be taken out when you buy a home using less than a 20% downpayment. When you have 20% equity in the home, you may ask your mortgage lender to drop the insurance.

Can I Deduct My PMI?

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

How Can I Cancel My PMI?

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

The Bottom Line

As of August 2022, it is uncertain if deductions for private mortgage insurance will continue for the tax year 2022. If you are filing your taxes for previous years, you may take advantage of deducting your private mortgage insurance or mortgage premium insurance if you meet specific requirements. However, the best way not to worry about whether or not your PMI will be deductible in the future is to pay down your mortgage bill. Once you hit 20% equity in your home, you can request your lender remove your private mortgage insurance from your mortgage bill.

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