Prior to 2017, only mortgages obtained or refinanced after January 1, 2007, were eligible for the tax deduction for private mortgage insurance (PMI), commonly known as mortgage insurance premium (MIP).
However, if eligible taxpayers submitted an updated federal tax return, The Further Consolidated Appropriations Act of 2020 permitted MIP and PMI tax deductions for 2020 (and 2021) as well as retrospectively for 2018 and 2019. Mortgage insurance premiums were allowed to be deducted as an itemized deduction until 2021, and taxpayers may claim this deduction on line 8d of Schedule A (Form 1040) for amounts accumulated or paid in 2021. In 2022, it’s unclear whether you’ll be able to write off your PMI.
Mortgage insurance premiums might be claimed as an itemized deduction on your tax return provided certain conditions were satisfied. This deduction is not permitted if your adjusted gross income (AGI) for 2021 is $109,000 or more. This also applies to married individuals who file separately; their adjusted gross income cap is $54,500.
- If you fulfill certain criteria, you may be able to write off private mortgage insurance on your taxes.
- The MIP and PMI tax deductions were extended by Congress in 2019 for 2020 and 2021 (and beyond), as well as retrospectively for 2018 and 2019.
- If you put 20% or more down when purchasing a home, private mortgage insurance is not required.
- The Tax Relief and Health Care Act of 2006 authorized the mortgage interest deduction.
- Since then, the issue of deductions for private mortgage insurance has come up for many votes in Congress.
PMI Tax Deduction: Legislation Timeline
The mortgage insurance deduction was first established by the Tax Relief and Health Care Act in 2006. The Protecting Americans from Tax Hikes (PATH)Act, passed by Congress in 2015, extended the deduction; however, it lapsed on December 31, 2016. Only one year was allowed under the extension.
Then Congress intervened once again. The mortgage insurance premium deduction was again made retroactively available through 2017 according to the Bipartisan Budget Act of 2018. The Mortgage Insurance Tax Deduction Act of 2019 was sponsored by California Representative Julia Brownley on January 8, 2019, and it would make the mortgage insurance deduction a permanent component of the tax law and apply retroactively to any sums paid or incurred since December 31, 2017.
The Further Consolidated Appropriations Act of 2020 permitted retroactive deductions for PMI taxes for the tax years of 2018 and 2019 as well as for 2020 (and subsequent tax years).
How Much Could the PMI Deduction Save a Taxpayer?
A reasonable rule of thumb is that you’ll pay $50 a month in premiums for every $100,000 of financing, depending on how much you owe and your tax rate. But keep in mind that your real cost may vary depending on your down payment size, loan type, and lender restrictions.
For instance, someone who puts 5% down on a $200,000 home would have to pay around $125 a month in PMI charges. If you increase your down payment to 10%, your monthly payment will be less than $80.
How will this impact your tax bill, then? Consider a person who has a $100,000 adjusted gross income. You put down 5% toward the purchase price of a $200,000 home and paid $1,500 ($125 times 12 months) in PMI payments. The $1,500 PMI deduction lowers your taxable income. If you pay $1,500 in taxes and are in the 12% tax bracket, you save $180; if you pay $1,500 in taxes and are in the 22% tax bracket, you save $330.
Even wonderful than a tax benefit is getting rid of PMI completely. When a homeowner has 20% equity in their property, PMI might be canceled.
The mortgage’s specified duration or 84 months, counting from the month the insurance began, must be divided among the insurance premium payments. Consider taking up a mortgage with a 15-year term that starts in July of the current year. The whole $8,600 needed mortgage insurance for the duration of the loan is paid in advance at the start of the loan.
Deduction = ($8,600 / 84) x 6 months = $614.29
You may deduct the aforementioned sum for the whole year if your income is lower than the maximum permitted.
Origins of Mortgage Insurance Tax Deduction
This tax break was first used for private mortgage insurance policies issued in 2007 and was created as a part of the Tax Relief and Health Care Act of 2006.
Because of the housing market’s sluggish recovery, the Protecting Americans from Tax Hikes Act of 2015 extended the deduction’s duration until 2016. On tax returns, line 8d of Schedule A contains the mortgage insurance deduction. One discovered the amount they put in this part in box 5 of the Form 1098 the lender issued them.
As of 2021, homeowners with PMI who are eligible may still write them off while paying their taxes.
What Is Private Mortgage Insurance?
If you put less than 20% down on a house, you must get private mortgage insurance. When your house has 20% equity, you may ask your mortgage lender to stop paying for the insurance.
Can I Deduct My PMI?
You may deduct your PMI from your federal taxes if you are filing for the tax years 2018, 2019, 2020, or 2021 and you fulfill the qualifying conditions.
How Can I Cancel My PMI?
Usually, you will need to keep your mortgage loan for 12 months with no missed payments, and have 20% equity in the house, before you can request your PMI be cancelled. Once you have 22% equity in your home, the majority of lenders will automatically stop paying your PMI.
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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