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Is private mortgage insurance (PMI) tax deductible?

Private mortgage insurance (PMI) federal income tax deduction returns
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Private mortgage insurance (PMI) federal income tax deduction returns
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You might not know it, but a couple years back, Congress reintroduced a federal tax deduction for private mortgage insurance (PMI). This means if you are a homeowner, it’s now possible to get a tax break on the premium payments you make on PMI.

This is a welcome development for homeowners who pay about 0.5 to 1 percent of their loan amount each year for this insurance that protects the lender if your down payment is below 20 percent of the home’s value.

So how do you actually benefit from tax deductibility of these payments? We’ll walk you through the complex world of private mortgage insurance and determine if you qualify for a tax deduction on your property.

Is PMI tax deductible?

The legislation, signed into law Dec. 20, 2019, not only makes the deduction available again for eligible homeowners for the 2020 and future tax years, but also enables taxpayers to take it retroactively for the 2018 and 2019 tax years by filing amended returns. You can amend federal returns within three years from the date of a timely filing of the original return or up to two years after you paid the tax owed, whichever is later.

But even if you qualify for the deduction, it may not make sense to take it. The deduction is only possible if you itemize deductions. And if your potential itemized deductions total is less than the standard deduction amount for your filing status, you’ll pay less tax by taking the standard deduction instead. Thus, the itemizations and the PMI deduction would be moot for you.

A general rule of thumb is that homeowners pay $50 a month in PMI 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.

A better move than deducting PMI is to get rid of it, if you can. Generally, homeowners can get PMI canceled and save the premiums once they achieve the threshold of 20 percent equity in their homes. All too often, homeowners continue to pay for PMI after they could have ended it, though by law mortgage servicers are required to drop this charge when the loan balance falls to 78 percent.

Restrictions on PMI tax deduction

The deduction is allowed only if the mortgage on which you pay PMI was taken out on or after Jan. 1, 2007.

While it’s easy to take the PMI deduction, make sure you meet the requirements.

If you refinanced your home since that time, you qualify for the PMI deduction on that loan. However, the mortgage insurance deduction applies to refinances up to the original loan amount, not to any extra cash you might have received with the new home loan.

You might be able to deduct private mortgage insurance payments on a second home, too. As with your primary residence, the loan on the second home must have been issued in 2007 or later to be deductible.

The PMI on the additional property qualifies only if the home is used by you personally. If you rent it out, then you won’t get PMI help from the IRS unless you claim tax breaks on the home as rental property.

How much can you save in federal taxes?

It depends on how much you owe and your tax bracket. The precise calculation can be complicated, as it involves various factors. But to get an idea of the savings available, let’s say your adjusted gross income is $100,000 and you’re paying $120 per month in PMI premiums. Deducting the premiums would reduce your taxable income by $1,440. If you’re in the 20-percent bracket, your annual tax savings would be in the neighborhood of $288 annually ($1,440 X .20).

Income phaseouts for PMI deductibility

Finally, while there is no statutory limit on the amount of PMI premiums you can deduct, the amount might be reduced based on your income.

The deduction begins phasing out when a homeowner’s adjusted gross income, or AGI, is more than $100,000. This income limit applies to single, head of household or married filing jointly taxpayers. The phaseout begins at $50,000 AGI for married persons filing separate returns.

The PMI deduction is reduced by 10 percent for each $1,000 a filer’s income exceeds the AGI limit. The deduction disappears completely for most homeowners whose AGI is $109,000, or $54,500 for married filing separately taxpayers.

Written by
AJ Dellinger
Contributing writer
AJ Dellinger is a contributing writer for Bankrate. AJ writes about auto loans and real estate.
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