Filing Your Income Taxes
When you're getting a mortgage to buy your property, your monthly payment may include items beyond just the loan principal and interest. Depending on your type of loan program and how much of a down payment you make, your lender may add private mortgage insurance to your monthly payment. Like with your mortgage interest, PMI is tax-deductible on your Schedule A when you choose to itemize.
However, the IRS sets specific rules on when your mortgage needs to have been taken out, as well as which taxpayers qualify for this deduction. So, it's important to consider all these factors before moving forward with the mortgage insurance tax deduction on your tax return.
Understanding Private Mortgage Insurance
While you can find special programs that might not require it, PMI is a common part of conventional mortgage programs for borrowers who can't provide a 20 percent or higher down payment. This offers the lender some security in case you can't make timely mortgage payments. Although it's an added expense, it can make homeownership more accessible to those without significant savings. While many borrowers see the PMI premium added to their mortgage payments until they have met the lender's set loan-to-value ratio, others pay for this expense upfront or have to pay both upfront and then monthly.
The mortgage insurance premiums you pay can vary based on various factors where your down payment amount, credit profile and loan program all play a part in determining it. The PMI can be as little as 0.25 percent and as much as 2 percent of the mortgage principal amount remaining. For example, if you have a $200,000 mortgage loan amount remaining, you may find that you pay $100 or $125 a month in PMI.
You usually stop paying mortgage insurance premiums once you meet your lender's terms. While you may need to request to cancel the PMI, lenders often automatically cancel it for you when the time comes.
Exploring the PMI Tax Deduction
Originally, PMI was deductible for itemizing taxpayers for tax years 2007 through 2017. This deduction had expired after the 2017 tax year and wasn't available in 2018 or 2019. However, a congressional act signed near the end of 2019 reinstated this helpful deduction and allowed taxpayers to file amended returns for 2018 and 2019 to get a retroactive PMI deduction.
This means that as long as you claim itemized deductions and not the standard deduction, you're free to report your PMI premiums and see a reduction in your federal taxable income to get some tax savings. However, there are limitations and considerations for taking this deduction that you'll need to know:
- AGI limits: You'll need to have a maximum adjusted gross income of $50,000 (married filing separately) or $100,000 (all other taxpayers) to deduct all your PMI. You could get a partial deduction if you make up to $54,500 (married filing separately) or $109,000 (all other statuses), but you disqualify with a higher AGI. The IRS has you go through some calculations when taking the deduction to determine what you can get.
- Mortgage origination date: If you took your mortgage out before Jan. 1, 2007, then you can't take this deduction.
- Home requirements: This deduction works for first and second homes for which you're the owner and on the loan. So, you can't get it as a renter or as someone who pays another person's mortgage.
- Allocation of PMI: You can only claim the PMI paid for the tax year. So if you prepay your PMI upfront, you'll need to properly allocate the payments to applicable tax years based on IRS rules. The IRS mentions this is usually 84 months or the mortgage term, whichever is shorter.
- Itemizing requirement: Deducting your PMI means losing the standard deduction for the year, so it requires careful consideration before you proceed. Consider that a single person gets a $12,400 standard deduction in 2020 and a $12,550 standard deduction in 2021, and these figures will double for those who are married and filing together. Look into other itemized deductions like for mortgage interest and property taxes since you may find you get a larger standard deduction instead. For example, if you're single with just $1,200 in PMI, $2,000 in property taxes and $5,000 in mortgage interest to deduct, then you'd only get an $8,200 tax deduction if you itemize – and that's $4,200 less than the 2020 standard deduction.
Finding PMI Paid
Once you've explored the IRS rules for the PMI deduction and find that your home, AGI and loan origination date all meet the terms, then you should look for Form 1098, Mortgage Interest Statement. Usually, lenders have to send this document early in the year as long as you've paid at least $600 in home mortgage interest for the tax year. You can locate your PMI premiums paid in box 5.
If you don't receive this form since you didn't pay enough mortgage interest, however, that doesn't mean you're out of luck. You can ask your lender how much PMI you paid during the year or possibly locate the information on your year-end mortgage statement. In this situation, though, consider whether you'll have enough total itemized deductions to make this extra work worth it.
Calculating Your PMI Deduction
As long as your AGI doesn't exceed the $50,000 or $100,000 limits for the full deduction depending on your filing status, your deductible PMI will simply be the reported amount paid for the year. If you have two qualifying homes, you can simply add up the PMI paid for each property and know your deduction. For example, if you paid $2,400 in PMI on your first home and $1,200 on your second home, then you'll have a $3,600 PMI deduction.
On the other hand, you'll need to complete the PMI deduction worksheet located in the IRS Schedule A instructions if your AGI (shown on Form 1040 line 8b) exceeds the full deduction limit but falls below the limit for a partial deduction. This worksheet has you enter PMI paid and your AGI. It then asks you to compare your AGI to the filing status thresholds and do various calculations to determine how much PMI is deductible. Here are the steps you'll take for the comparison.
- Take your AGI and subtract either the $50,000 or $100,000 limit from it.
- Round up to the next $500 or $1,000 if necessary to have an even multiple.
- Take that new income and divide it by $5,000 (married filing separately) or $10,000 (all other statuses) to get a decimal multiplier. Use 1 if your multiplier is equal to or higher than 1.
- Multiply your PMI paid by the multiplier in step three to get an excluded amount.
- Subtract the above amount from your PMI paid to get your final deduction amount.
Deducting PMI Premiums
Actually, taking the mortgage insurance tax deduction can be easier than doing the initial calculations and research. You'll need to go to Schedule A, Itemized Deductions, and then put your deductible PMI amount on line 8d.
This is also a good time to claim other home-related itemized deductions. For example, you can put your mortgage interest paid from box 1 of Form 1098 on line 8 of your Schedule A. You can list your property taxes on line 5b as well. Don't forget that you can also consider medical expenses, casualty losses from presidentially declared natural disasters, charitable contributions and local and state taxes on Schedule A.
Once you're done claiming itemized deductions, follow Schedule A's instructions to total everything claimed to get your final amount on line 17. That amount then gets transferred to Form 1040 on line 9 as a below-the-line tax deduction.
- Consumer Financial Protection Bureau: What Is Private Mortgage Insurance?
- IRS: Changes to the Deductibility of Mortgage Insurance Premiums (MIP)
- IRS: Schedule A
- IRS: 2019 Instructions for Schedule A
- IRS: Form 1098, Mortgage Interest Statement
- IRS: Form 1040
- Bankrate: Private Mortgage Insurance (PMI) Federal Income Tax Deduction Returns
- Investopedia: 5 Types of Private Mortgage Insurance (PMI)
- Kiplinger: What's the Standard Deduction for 2020 vs. 2021?
- Credit Karma: Can I Claim the Mortgage Interest Deduction if I Don’t Have Form 1098?
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Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.