Can You Deduct PMI on Taxes? How to Qualify

Private Mortgage Insurance (PMI) is a common aspect of homeownership for many individuals, particularly those who make a smaller down payment when purchasing a home. While it serves a specific purpose for lenders, its tax deductibility has been a recurring question for homeowners navigating the complexities of federal income tax laws. Understanding the nuances of PMI and its potential impact on your tax situation can help in managing home-related expenses.

Understanding Private Mortgage Insurance

Private Mortgage Insurance (PMI) is a type of insurance policy that protects the mortgage lender, rather than the borrower, in the event a homeowner defaults on their loan. Lenders typically require PMI when a borrower makes a down payment of less than 20% of the home’s purchase price on a conventional loan. This insurance mitigates the increased risk lenders face with lower equity contributions. PMI is distinct from homeowners insurance, which protects the homeowner and their property from damage.

The cost of PMI varies depending on factors such as the loan amount, down payment size, credit score, and whether the mortgage has a fixed or adjustable rate. PMI costs generally range from 0.3% to 1.5% of the original loan amount annually. PMI is most commonly paid as a monthly premium added to your regular mortgage payment. Other payment options include a single upfront premium paid at closing or a combination of an upfront fee and lower monthly premiums.

Qualifying for the PMI Deduction

The ability to deduct private mortgage insurance premiums on federal taxes has been subject to legislative changes over time. Historically, the deduction was available for eligible homeowners who itemized their deductions. However, the mortgage insurance deduction expired after the 2021 tax year, meaning it is not available for tax years 2022 and beyond.

For the years it was available (2018-2021), specific conditions applied. The mortgage on which PMI was paid had to be taken out on or after January 1, 2007. It applied to primary residences and second homes used personally. The PMI itself needed to be for a qualified mortgage insurance contract, typically one connected with a home acquisition loan, which means a loan used to buy, build, or substantially improve a home.

The deduction was only applicable if taxpayers itemized deductions on Schedule A of Form 1040. If PMI was prepaid, it generally had to be allocated over the shorter of the stated mortgage term or 84 months (seven years), starting from the month the insurance was obtained.

Adjusted Gross Income Limits for PMI Deduction

When the PMI deduction was active, it was subject to Adjusted Gross Income (AGI) limitations, which phased out the deduction for higher-income taxpayers. For instance, for the 2021 tax year, the deduction began to phase out if a taxpayer’s AGI exceeded $100,000. For those married filing separately, the phase-out began at an AGI of $50,000.

The deduction was reduced by 10% for every $1,000 that a taxpayer’s AGI exceeded the initial threshold. This meant the deduction was completely eliminated for individuals with an AGI over $109,000 ($54,500 for married filing separately) for the 2021 tax year.

Reporting the PMI Deduction

When the Private Mortgage Insurance deduction was available, reporting it required specific steps. Homeowners who met the eligibility criteria and chose to itemize their deductions would report the deductible amount on Schedule A (Form 1040). This amount was entered on line 8d, designated for “Mortgage insurance premiums.”

To accurately report the deduction, taxpayers relied on Form 1098, “Mortgage Interest Statement,” which lenders are required to send. This form typically reports mortgage interest paid, and for eligible years, it also included the amount of mortgage insurance premiums paid in Box 5. Maintaining accurate records is always prudent for tax purposes.