Can I Deduct Mortgage Insurance Premiums?

Mortgage insurance is a policy that protects a lender if a borrower defaults on a loan, typically required when a homebuyer makes a down payment of less than 20% of the property’s purchase price. For a period, homeowners were permitted to deduct the cost of this insurance on their federal income tax returns.

The ability to deduct mortgage insurance premiums has not been a permanent feature of the tax code. Congress periodically allowed this deduction, but it expired at the end of 2021. As of the 2022 tax year and for subsequent years, this deduction is no longer available. The following information pertains to the rules that were in effect for tax years up to and including 2021, which may be relevant for individuals amending a prior year’s tax return.

Determining Your Eligibility for the Deduction

To have claimed the mortgage insurance premium deduction for tax years through 2021, a homeowner’s financial situation was a primary factor. The deduction was subject to income limitations based on a taxpayer’s Adjusted Gross Income (AGI). For the 2021 tax year, the deduction began to phase out for taxpayers with an AGI over $100,000 and was completely eliminated for those with an AGI exceeding $109,000. For married individuals filing separately, these thresholds were $50,000 and $54,500, respectively.

Beyond the income limits, other conditions had to be met to qualify. The mortgage itself must have been for the purchase, construction, or substantial improvement of a primary residence or a second home. A second home could be any other residence you owned and was not rented out to others. Investment properties and rental homes were not eligible for this tax benefit.

Another requirement related to the timing of the insurance policy. The mortgage insurance contract must have been issued after December 31, 2006. If your policy was in place before 2007, the premiums paid were not deductible.

Identifying Qualifying Insurance Payments

Several types of mortgage insurance payments were considered eligible for the deduction, covering a range of government-backed and conventional loans. These payments, while named differently, serve the same function as traditional mortgage insurance and were treated as such for tax purposes.

• Private mortgage insurance (PMI), which is typically associated with conventional loans obtained from private lenders.
• Mortgage insurance premiums (MIP) that homeowners with loans insured by the Federal Housing Administration (FHA) paid.
• Guarantee fees for loans from the U.S. Department of Agriculture (USDA) Rural Development program.
• Funding fees for loans guaranteed by the Department of Veterans Affairs (VA).

A specific rule applied to homeowners who paid their mortgage insurance premiums upfront at the time of closing, a practice sometimes referred to as a single-premium or lump-sum payment. These prepaid amounts could not be deducted in their entirety in the year they were paid. Instead, the IRS required these premiums to be allocated and deducted over the shorter of the actual life of the mortgage or a period of 84 months (seven years). For example, if a homeowner paid $4,200 in upfront PMI on a 30-year loan, they would have had to spread that deduction over 84 months, resulting in a deductible amount of $600 for a full year.

Calculating Your Total Deduction Amount

For taxpayers whose AGI fell within the phase-out range, calculating the precise deductible amount required a specific formula. The reduction was not an all-or-nothing cliff but a gradual decrease. If your AGI was $100,000 or less ($50,000 for married filing separately), you could deduct 100% of your eligible premiums.

The first step was to determine the amount by which your AGI exceeded the $100,000 threshold. Next, this excess amount was divided by $10,000 (or $5,000 for married filing separately), which represented the full income range over which the deduction was phased out. This result, expressed as a percentage, represented the portion of your premiums that was not deductible.

For instance, consider a single filer in 2021 with an AGI of $105,000 who paid $1,200 in mortgage insurance premiums for the year. Their AGI exceeded the threshold by $5,000. Dividing $5,000 by $10,000 gives a result of 0.50, or 50%. This meant that 50% of their premiums were non-deductible.

To find the final figure, you would multiply the total premiums paid ($1,200) by the non-deductible percentage (50%), which equals $600. This non-deductible portion was then subtracted from the total premiums paid ($1,200 – $600), leaving a final deductible amount of $600. This final amount was what the taxpayer would report on their tax return.

How to Claim the Deduction on Your Tax Return

Claiming the mortgage insurance premium deduction required a taxpayer to itemize their deductions rather than taking the standard deduction. This meant the total of all their itemized deductions—including things like state and local taxes, mortgage interest, and charitable contributions—had to be greater than the standard deduction amount for their filing status for that year. If the standard deduction was higher, there would have been no tax benefit from itemizing.

The total amount of mortgage insurance premiums paid for the year was reported by the mortgage lender in Box 5 of Form 1098, the Mortgage Interest Statement. This form is sent to homeowners by their lenders each January and provides a summary of all the mortgage interest and related expenses paid during the previous year.

After calculating the final deductible amount, taking into account any AGI-based phase-outs, the taxpayer would report this figure on Schedule A (Form 1040), Itemized Deductions. Specifically, the amount was entered on the line designated for mortgage insurance premiums. This schedule was then filed along with the main Form 1040 tax return.