Private mortgage insurance (PMI) is a cost that is often associated with conventional loans when you have not made a down payment of at least 20% of the purchase price. It serves as protection for your lender in case you default on your home loan. While it is typically added to your monthly mortgage payment, there is a chance that your PMI could be tax deductible for past tax years if you meet specific requirements. In this article, we will explore how the tax deduction for PMI works and when you can claim it.
Legislation Timeline: When is PMI Tax Deductible?
The Tax Relief and Health Care Act of 2006 classified PMI as a type of mortgage interest. Initially, the deduction was supposed to end in 2016, but it was extended to 2017. In 2019, legislation was passed to retroactively apply the deduction for payments made since 2017. It was further extended in 2020 to include 2020 and 2021, with the option to retroactively claim it for 2018 and 2019. However, the PMI deduction was not extended for 2022, and it is currently unavailable for those paying mortgage insurance premiums.
Restrictions on PMI Tax Deduction
While the most significant restriction on the PMI tax deduction is its unavailability for the current tax year, there are other limitations for past years. To take advantage of the mortgage interest deductions, including PMI, you must have itemized your deductions. Additionally, PMI paid on mortgages issued before January 1, 2007, cannot be claimed as a deduction. Finally, there was a phaseout for individuals earning over $100,000 ($50,000 for married filing separately), resulting in a reduction in the deduction amount.
How Much Can You Save in Federal Taxes?
The amount you can save with a PMI deduction depends on your mortgage insurance payments and your tax bracket. On average, you can expect to pay between 0.22% and 2.25% of your mortgage on PMI, with a common rule estimating $50 per month for every $100,000 financed. For example, if you bought a home for $320,000 with a $20,000 down payment, financing $300,000, you would likely pay about $150 per month in mortgage insurance premiums, totaling $1,800 per year. Assuming you are in the 22% tax bracket for 2021 and itemized your deductions, your potential tax savings would be $1,800 x 22%, amounting to $396 on your federal taxes.
Example Calculation
To calculate your deduction for the year, allocate mortgage premiums using the smaller of 84 months or the loan term. Suppose your total PMI premiums on a 15-year mortgage amount to $10,320 over 84 months, and you only paid PMI for six months during the first year. In that case, your deduction for the year would be ($10,320 / 84) x 6 = $737. Keep in mind that a tax deduction is not a direct reduction in your tax bill, but rather a way to lower your taxable income. Assuming a 22% tax bracket, the estimated tax savings on a $737 deduction would be $162.14.
Income Phaseouts for PMI Deductibility
The most recent income phaseouts for PMI deductibility were as follows:
- Adjusted Gross Income (AGI) of $100,000 for filers who are not married filing separately, with a reduction of 10% for each $1,000 above the threshold, leading to a total phaseout for AGI above $109,000.
- AGI of $50,000 for married filing separately, with a reduction of 10% for each $500 above the threshold, resulting in a total phaseout for AGI above $54,500.
Should You Claim a PMI Deduction for Past Years?
If you are still working on your taxes, you can claim a PMI deduction for past years if you qualify. You can file an amended return to claim it for years when you were eligible but didn’t take advantage of the deduction. However, it is important to consider the effort and potential benefit before deciding whether it is worthwhile for you.
Origins of Mortgage Insurance Tax Deduction
The mortgage insurance tax deduction was introduced in 2006 to apply to policies issued in 2007 and onwards. It aimed to provide tax relief by considering PMI as a type of mortgage interest. Although the deduction was extended multiple times, it expired at the end of 2021. As a result, mortgage insurance premiums paid in 2022 are not tax deductible, unless Congress enacts retroactive measures.
Frequently Asked Questions (FAQs)
How can I cancel my PMI?
You can request the cancellation of PMI once you reach the date specified in your PMI disclosure form, indicating an 80% loan-to-value ratio on your home. Submit a written request for cancellation. In the absence of a request, PMI will be automatically canceled when your home’s loan-to-value ratio is scheduled to reach 78%, provided you are current on your payments.
Is PMI on an FHA loan tax deductible?
No, currently, PMI on an FHA loan is not tax deductible. It would require a congressional action to change this.
Can PMI be removed if the home value increases?
Yes, if your home’s value increases, it is possible to have your PMI removed. However, you will need an appraisal and work with your lender to ensure that the new value raises your equity above 20%.
TIME Stamp: PMI Tax Deductions Ended, but Retroactive Claims May Be Possible
For over a decade, PMI was tax deductible for eligible homeowners who itemized their deductions. However, starting from the 2022 tax year, new PMI payments are no longer eligible for deductions as the PMI deduction has expired. Nevertheless, under specific circumstances, you can potentially claim the deduction retroactively for certain years through an amended tax return.
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