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Private mortgage insurance (PMI) is usually charged on a conventional loan if you don’t make a down payment of at least 20% of the purchase price. It’s designed to protect your lender in the event that you default on your home loan. Normally, you pay your premium monthly, and it’s added to your mortgage payment. You can have it removed after your loan-to-value ratio reaches 80%.
In the meantime, though, if you meet certain requirements, your PMI could be tax deductible for past tax years. Let’s take a look at how the tax deduction for PMI works and when you can claim it.
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When is PMI tax deductible? Legislation timeline
PMI was considered a type of mortgage interest as a result of the Tax Relief and Health Care Act of 2006. The last year it was supposed to be claimed was 2016, but the deduction was extended to 2017. Later, in 2019, legislation was passed to retroactively apply the deduction for the payments made since 2017. In 2020 the tax deduction was extended to include 2020 and 2021. The rules also included the ability to retroactively take it in 2018 and 2019.
However, the PMI deduction wasn’t extended for 2022, and currently it isn’t available for those paying mortgage insurance premiums.
Restrictions on PMI tax deduction
The biggest restriction on the PMI tax deduction is the fact that it’s no longer available as of tax year 2022. However, if you qualify for past years, there are other restrictions. These include:
- You must have itemized your deductions to take advantage of mortgage interest deductions, including PMI.
- Any mortgage contracts issued before Jan. 1, 2007, were excluded; PMI paid on mortgages issued before that date couldn’t be taken as a deduction.
- Finally, there was a phaseout. For those making more than $100,000 ($50,000 for married filing separately), the amount of the deduction would be reduced.
How much can you save in federal taxes?
The amount of money you would have saved with a PMI deduction depends on how much you’re paying in mortgage insurance, as well as your tax bracket.
According to Chase, you can generally expect to pay anywhere between 0.22% and 2.25% of your mortgage on PMI. One common rule is to estimate that you’re likely to pay $50 per month for every $100,000 that you finance.
Let’s say you buy a home for $320,000 and put $20,000 down, financing $300,000. You’re likely to pay about $150 per month in mortgage insurance premiums. That amounts to $1,800 per year. Let’s say that you’re married filing jointly and making $90,000 a year, putting you in the 22% tax bracket for 2021. In that case, if you itemized, your deduction would have saved you $1,800 x 22%, amounting to $396 on your 2021 federal taxes.
You allocate mortgage premiums by using the smaller of 84 months or the term of the loan. Let’s take a different example and say that your total PMI premiums on a 15-year mortgage, beginning in July of the tax year, would amount to $10,320 over the course of the loan. (Remember that, after you reach a loan-to-value ratio of 80%, you can have PMI removed. This calculation assumes that PMI will drop off before the 15-mortgage term ends.)
Also assume that the total PMI will be divided over the course of 84 months, as that is shorter than 15 years, and remember that you only paid PMI for six months during the first year you had the mortgage. The calculation to determine the amount of your deduction for that year would look like this: ($10,320 / 84) x 6 = $737. The $10,320 represents the total amount of PMI added to the mortgage, while the 84 is the monthly amount, using the allocation assumption. You would get a monthly premium of about $122.86. Now, because you bought the home midway through the year, you can only deduct for the final six months. Your total deduction would be $122.86 x 6 months, or $737.
It’s important to remember that a tax deduction is not a dollar-for-dollar reduction in your tax bill. Your tax savings are different from your deduction. Assuming a 22% tax bracket, the potential estimated tax savings on a deduction of $737 would be $162.14.
Income phaseouts for PMI deductibility
- Adjusted gross income (AGI) of $100,000 for filers who aren’t married filing separately. For each $1,000 above this threshold, the deduction is reduced by 10% until there is total phaseout for above $109,000 AGI.
- AGI of $50,00 for married filing separately. For each $500 above that threshold, the deduction amount is reduced by 10%, until the total income phaseout above $54,500 AGI.
Should I claim a PMI deduction for past years?
You can claim a PMI deduction for past years if you’re still working on your taxes. If you didn’t claim PMI in past years, and you were eligible, you can file an amended return for those years to claim it.
Whether it makes sense to do this depends on how much money you’d actually save. Consider the time and effort it would take, and whether you would receive enough back to make it worthwhile.
Origins of mortgage insurance tax deduction
The mortgage insurance tax deduction was added to the law in 2006 to apply to policies issued in 2007 and beyond. The idea was to provide some added tax relief by including PMI as a type of mortgage interest. The mortgage insurance tax deduction was extended more than once in subsequent years. However, it finally expired at the end of 2021. Mortgage insurance premiums paid in 2022 aren’t tax deductible unless Congress acts again and makes the deduction retroactive.
TIME Stamp: PMI tax deductions ended, but retroactive claims may be possible
For a little more than a decade, PMI was tax deductible for homeowners who met eligibility requirements and itemized their deductions. Since the 2022 tax year, it’s no longer possible to take deductions on new mortgage insurance payments, as the PMI deduction has expired. Under certain circumstances, however, you can claim it retroactively for certain years through an amended tax return.
Frequently asked questions (FAQs)
How can I cancel my PMI?
You can cancel your PMI by requesting it to be removed once you reach the date on which you are predicted to reach an 80% loan-to-value ratio on your home. This date should appear on the PMI disclosure form provided to you when you took out your mortgage. You must submit a written request. If you don’t make the request, your PMI will, by law, be automatically canceled once you reach the date that your home’s loan-to-value ratio is scheduled to reach 78%, as long as you are current on your payments.
Is PMI on an FHA loan tax deductible?
No. It used to be tax deductible, but currently it is not. It will require an act of Congress to change this.
Can PMI be removed if home value increases?
Yes, it’s possible to have your PMI removed if your home has increased in value. However, you need to have an appraisal done and work with your lender to ensure that your home’s new value raises your equity to above 20%.
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