When Is Mortgage Insurance Tax Deductible?

At one time, the final yr that the tax deduction for personal mortgage insurance coverage (PMI), often known as mortgage insurance coverage premium (MIP), was allowed was for the tax yr 2017—however just for mortgages taken out or refinanced after Jan. 1, 2007.

Nevertheless, The Additional Consolidated Appropriations Act of 2020 allowed MIP and PMI tax deductions for 2020 (and 2021) and retroactively for 2018 and 2019 if certified taxpayers filed an amended federal tax return. The itemized deduction for mortgage insurance coverage premiums was prolonged by 2021, and tax filers had been in a position to the deduction on line 8d of Schedule A (Kind 1040) for quantities paid or accrued in 2021. It’s unsure if it is possible for you to to deduct your PMI in 2022.

If particular necessities had been met, mortgage insurance coverage premiums may very well be deducted as an itemized deduction in your return. In case your adjusted gross revenue (AGI) is $109,000 or extra for 2021, this deduction just isn’t allowed. This additionally holds true for married folks submitting individually, for whom the adjusted gross revenue restrict is $54,500.

PMI Tax Deduction: Laws Timeline

The Tax Reduction and Well being Care Act first launched the deduction for mortgage insurance coverage again in 2006. In 2015, Congress prolonged the deduction with the Defending Individuals from Tax Hikes (PATH) Act, however the deduction expired on December 31, 2016. The extension was good for just one yr.

Congress then stepped in once more. The Bipartisan Funds Act of 2018 prolonged the mortgage insurance coverage premiums deduction retroactively once more by 2017. On January 8, 2019, California Consultant Julia Brownley launched the Mortgage Insurance coverage Tax Deduction Act of 2019, which might make the mortgage insurance coverage deduction a everlasting a part of the tax code and would apply retroactively to all quantities paid or accrued since December 31, 2017.

The Additional Consolidated Appropriations Act of 2020 allowed PMI tax deductions for 2020 (and future tax years) and retroactively for 2018 and 2019.

How A lot May the PMI Deduction Save a Taxpayer?

It is determined by how a lot you owe and your tax bracket, however a very good rule of thumb is that you just’ll pay $50 a month in premiums for each $100,000 of financing. Take note, although, that the quantity of the down cost, sort of mortgage, and lender necessities can all have an effect on your precise value.

For instance, if somebody places 5% down on a $200,000 home, they’ll pay month-to-month PMI premiums of about $125. Improve your down cost to 10%, and also you’ll pay lower than $80 a month.

So how does this have an effect on your tax invoice? Think about somebody’s adjusted gross revenue is $100,000. You got a $200,000 home, put down 5%, and paid $1,500 in PMI premiums ($125 instances 12 months). The deduction for PMI cuts your taxable revenue by $1,500. In the event you’re within the 12% tax bracket, you save $180 in your tax invoice ($1,500 x 12%), and in case you’re within the 22% tax bracket, you save $330 ($1,500 x 22%).

Instance Calculation

You have to allocate the insurance coverage premiums over the shorter of the said time period of the mortgage or 84 months, starting the month the insurance coverage began. Suppose you’re taking out a 15-year mortgage that begins in July of the present yr. At first of the mortgage, you prepay the entire required mortgage insurance coverage for the time period of the mortgage, on this case, $8,600.

Deduction = ($8,600 / 84) x 6 months = $614.29

In case your revenue is lower than the utmost allowed, you possibly can deduct the above quantity for the yr.

Origins of Mortgage Insurance coverage Tax Deduction

This tax deduction originated as a part of the Tax Reduction and Well being Care Act of 2006 and was initially utilized to non-public mortgage insurance coverage insurance policies issued in 2007.

In response to the sluggish restoration within the housing market, the Defending Individuals from the Tax Hikes Act of 2015 prolonged the deduction to 2016. The mortgage insurance coverage deduction was discovered on Schedule A on tax returns on line 8d. The quantity one entered on this part was present in field 5 of Kind 1098 despatched by the lender.

As of 2021, if householders with PMI meet eligibility necessities, they’ll nonetheless deduct them when submitting a tax return.

The Backside Line

As of August 2022, it’s unsure if deductions for personal mortgage insurance coverage will proceed for the tax yr 2022. In case you are submitting your taxes for earlier years, you might make the most of deducting your personal mortgage insurance coverage or mortgage premium insurance coverage in case you meet particular necessities. Nevertheless, one of the best ways to not fear about whether or not or not your PMI shall be deductible sooner or later is to pay down your mortgage invoice. When you hit 20% fairness in your house, you possibly can request your lender take away your personal mortgage insurance coverage out of your mortgage invoice.