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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.”
It usually costs 0.5% to 2% of your loan amount annually. The average mortgage balance in the U.S. is around $200,000, so PMI can be an extra $1,000 to $4,000 on average each 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. Currently, the federal PMI tax deduction is available for 2020, but won’t be around in 2021 unless it is extended, says Suzanna Lam, tax CPA and CEO of the California- based financial services firm Innochamp Advisors.
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.
What Exactly Is PMI?
If you take out a conventional mortgage with a down payment of less than 20%, you should expect to pay for PMI. This insurance protects the lender if you stop paying your mortgage. In most cases, once you’ve built up at least 20% equity in your home you can request PMI cancellation.
Private mortgage insurance is fully tax deductible if your combined household adjusted gross income is less than $100,000.
Some government-backed loans also have mortgage insurance stipulations as well. Home loans from both the Federal Housing Agency and the U.S. Department of Agriculture require upfront mortgage insurance premium payments in addition to ongoing monthly payments. You’ll pay mortgage insurance premiums on these loans regardless of the size of your down payment. To get rid of mortgage insurance on a government-secured loan, you typically need to refinance to a conventional loan once you have at least 20% equity in your home.
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 90% of households take the standard deduction, according to estimates from the Urban-Brookings Tax Policy Center. The standard deduction for 2019 was $12,200 for single taxpayers, and it’s increasing to $12,400 for the 2020 tax year.
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.
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.
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.