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Is FHA Mortgage Insurance Tax Deductible?

Is FHA Mortgage Insurance Tax Deductible?
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Private mortgage insurance isn’t just required by Federal Housing Administration-backed lenders. It’s a common component of a home mortgage when borrowers make a down payment on a loan of less than 20 percent. The insurance kicks in to pay off the lender if you default on your mortgage. The idea is that you’re more likely to default if you have less of a financial stake in the property from the loan’s inception.

The rules for FHA mortgage insurance are slightly different than for conventional loans, but the federal tax deduction for these premiums applies to both.

FHA Mortgage Insurance Premiums

Private mortgage insurance is generally referred to as MIP – mortgage insurance premiums. It can increase your monthly payments, and your closing costs as well. But the federal government takes pity. It’s provided a tax deduction for this expense over the years, although in fits and starts.

The deductibility depends on federal legislation in place in any given year. The Further Consolidated Appropriations Act made it available again in ​2020​ after it was temporarily repealed by Congress in ​2017​ after 10 years of cutting some taxpayers a bit of a break. It was then extended through tax year 2021. The 2020 legislation actually reinstated the deduction retroactively to 2018, so you might still be able to go back and amend previous years’ returns to claim it. You generally have three years from the date you filed your original return, or two years from the date you last paid any tax due on the return, whichever is later.

How Mortgage Insurance Works

MIP is payable in one lump sum at closing and it makes up a percentage of your premiums over the course of the loan’s life. This effectively acts as two separate premiums.

The upfront premium is ​1.75 percent​ of the amount you’re borrowing as of tax year 2022. The annual fee, typically broken up into ​12 payments a year​ is ​0.85 percent​ of your mortgage balance over the lifetime of the mortgage. You can include the upfront payment in your overall loan amount so you don’t have to come up with the cash at closing, but this, too, will increase your monthly payments.

You can generally cancel your mortgage insurance with conventional lenders when you've built up 20 percent equity in your home, but this isn’t the case with FHA mortgage insurance. An exception exists if you make a down payment of at least ​10 percent​. You can sometimes cancel MIP in this case after you’ve dutifully paid on the mortgage for ​11 years​.

Rules and Restrictions for the Tax Deduction

The IRS allows you to deduct these premiums from your taxable income on your 2021 tax return which you'll file in 2022. But, of course, there are rules.

Mortgages taken out before ​Dec. 20, 2006fail to qualify, but a loophole allows the deduction if you refinance a mortgage that originated before the deadline. You can claim a deduction for the insurance in this case, but only up to the original loan amount. Any extra portion of your mortgage isn’t eligible if you refinanced for more than you originally borrowed.

How Much Is the Deduction?

This is one of those tax deductions that depends on your adjusted gross income or AGI – your taxable income that remains after taking certain above-the-line adjustments to income but before you claim the standard deduction or itemize other deductions.

As of ​tax year 2021​, the tax return you’d file in 2022, the amount of insurance premiums you’re entitled to deduct begins decreasing by ​10 percent per each $1,000​ of your AGI over ​$100,000​, or ​$50,000​ if you're married and filing a separate return. You can’t claim this deduction at all with an AGI of more than ​$109,000​. or ​$54,500​ if you're married and filing separately.

You can find your AGI on line 11 of the 2021 Form 1040 when you complete the first page of your tax return and before taking this deduction. You can deduct the full amount of the insurance premiums you pay if your AGI falls below these limits. Otherwise, the IRS provides a Mortgage Insurance Premiums Deductible Worksheet on its website to help you calculate how much of a deduction you’re entitled to claim, as well as an interactive calculator online.

How to Claim the Deduction

Perhaps the easiest part of claiming the mortgage insurance tax deduction is determining how much you paid. Your lender should provide you with a Form 1098 after the end of the tax year, telling you the amount of your premiums if they total ​more than $600​ for the year. This information should appear in ​box 5​.

Now complete the first part of your tax return to arrive at your AGI. Use the worksheet or the interactive calculator provided by the IRS to determine how much of a deduction you’re entitled to claim if your AGI comes in over the threshold amount for your filing status. Finally, roll up your shirtsleeves and prepare Schedule A, because mortgage insurance premiums are an itemized deduction. Schedule A tallies up all the itemized deductions you’re entitled to claim for the tax year.

Itemizing vs. the Standard Deduction

You might not want to automatically claim this deduction without giving it some thought, even if you meet all the qualifying rules. Compare the total of all your itemized deductions on Schedule A to the standard deduction you’re entitled to claim for your filing status. If it’s less than your standard deduction – and it might be – you’re better off foregoing the mortgage insurance deduction and claiming the standard deduction instead. The standard deduction will reduce your taxable income more.

Keep in mind that the Tax Cuts and Jobs Act effectively doubled the standard deductions in 2018 and going forward through 2025, and they tend to increase a little each year to keep pace with inflation. As of ​tax year 2021​, the return you'll file in 2022, they're set at:

  • $12,550​ for single taxpayers and married taxpayers filing separate returns
  • $25,100​ for married taxpayers filing joint returns and qualifying widow(ers)
  • $18,800​ for those who qualify as head of household

You'll need a good many itemized deductions in addition to your mortgage insurance premiums to exceed these amounts.

The Deduction’s Status Going Forward

Given its on-again-off-again history, this tax deduction might not disappear for all time Dec. 31, 2021. Keep your eye on the news so you’ll know if Congress renews it again for yet another year or more. This deduction isn’t technically part of the Internal Revenue Code, but rather a gift that Congress periodically throws to the taxpaying masses.