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You may be able to deduct thousands of dollars a year in private mortgage insurance, or PMI, fees from your taxes.
Not all homeowners with a mortgage pay private mortgage insurance; it generally applies when you have less than 20% equity in your property, says Amanda Han, CPA and co-author of “The Book on Advanced Tax Strategies: Cracking the Code for Savvy Real Estate Investors.”
PMI usually costs $30 to $70 a month for each $100,000 borrowed, according to Freddie Mac. With a loan amount of $275,500 (the median mortgage loan amount of new homes purchased in 2020, according to ATTOM Data Solutions), PMI could be an extra $83 to $193 a month. That’s $996 to $2316 in a year on top of your mortgage, interest, and homeowner’s insurance.
In the past few years, the rules affecting the federal tax deduction have changed repeatedly.
The deduction expired in 2017, then it was restored in late 2019 and retroactively applied to the 2018 tax year. The deduction was available for the 2020 tax year and extended through the 2021 tax year via the Consolidated Appropriations Act.
So let’s take a look at when you’ll be responsible for paying PMI and when you can save a bit on your taxes because of it.
When Is PMI Tax Deductible?
For most people, whether or not PMI is deductible is a moot point.
A PMI tax deduction is only possible if you itemize your federal tax deductions. For anyone taking the standard tax deduction, PMI doesn’t really matter, Han says. Roughly 86% of households are estimated to take the standard deduction, according to the Tax Foundation. The standard deduction for 2020 was $12,400 for single taxpayers or $24,800 for married couples filing jointly, and it’s increasing to $12,550 for single filers and $25,100 for couples for the 2021 tax year.
If you are going to itemize your taxes, it’s usually a good idea to work with a tax professional. This is especially important as your tax return gets more complicated, because you don’t want to miss out on potential tax savings.
Income Phaseouts for PMI Tax Deduction
If you itemize your tax deductions, then you’ll want to claim your PMI premiums if you can. But there are other restrictions on who can take the PMI deduction.
If your adjusted gross income (AGI) is over $100,000, then the PMI deduction begins to phase out. Between $100,000 and $109,000 in AGI, the amount of PMI you can claim is reduced by 10% for each $1,000 in increased income. Once you hit $109,000 in AGI, you are no longer eligible to claim a PMI tax deduction.
The same income limit applies to single taxpayers or to those who are married filing jointly, Han says, which constitutes a marriage penalty.
How Much Tax Can You Save?
The exact amount you can save by claiming a PMI deduction depends on how much you paid in PMI premiums that year, your annual gross income, your tax rate, and what other itemized tax deductions you’re planning to claim. Let’s look at the following scenario for a married couple filing jointly for the 2021 tax year, who have enough tax deductions for itemizing deductions to be worth it:
|Annual household taxable income||$78,500 (the median household income in 2020, according to the Department of Housing and Urban Development)|
|Value of other itemized deductions apart from PMI||$25,100|
|Annual PMI payments||$1,653*|
|Federal taxes owed after other itemized deductions, before PMI deduction, for 2021 tax year||$6,010|
|Federal taxes owed after other itemized deductions and PMI deduction, for 2021 tax year||$5,812|
|Money saved on taxes from PMI deduction||$198|
Keep in mind that the exact figures will depend on your own household income, tax deductions, and PMI payment amounts and might differ from the example. But all in all, if you already have enough tax deductions that taking an itemized deduction is worth your while, deducting your PMI can save you a couple hundred dollars on top of that. But for most people, taking the standard deduction will be the better deal.
Should I Claim a PMI Deduction for Past Years?
If you take itemized deductions and didn’t claim PMI, you can go back and file amended returns, Han says. Generally, you have up to three years to file an amended return.
If you are considering filing an amended return, you should make sure it makes sense to claim a PMI deduction for past years. The same PMI deduction restrictions apply to previous tax years, too. So you can’t claim a PMI deduction for any year your AGI was over $109,000.
Keep in mind, Lam says, that it may not be worth hiring a CPA or buying new tax software for the sole purpose of filing amended returns to claim a PMI deduction.