Mortgage lenders generally require private mortgage insurance (PMI) when borrowers cannot put down at least 20% on a home loan. PMI premiums can add significant amounts to monthly mortgage payments, but the pain was partially alleviated by a tax deduction for PMI policies issued after 2006. However, the deduction was allowed to expire starting in the 2022 tax year and has not yet been renewed by Congress. Still, for those who qualify and are still working on past years’ taxes, amending old returns to claim the PMI deduction retroactively may make sense. For a typical homebuyer deducting a common PMI premium amount, the potential federal tax savings comes to a few hundred dollars per year. Talk to a financial advisor for guidance on this and other financial matters.
PMI Basics
PMI provides lenders with protection against the risk of a default when borrowers buy a home with a down payment under 20% of the purchase price. Premiums for PMI are added to mortgage payments. The cost could be up to 1% of the loan amount annually.
Legislation making PMI tax deductible was passed in 2006. It applied the deduction to policies issued in the 2007 tax year going forward. The measure has been periodically renewed, but expired after the 2021 tax year.
Currently, PMI is not deductible for the 2022 or later tax years. That could retroactively change, however, if Congress passes an extension allowing filers to claim deductions for mortgage insurance premiums paid in those years.
Who Can Deduct PMI
To qualify for deducting private mortgage insurance premiums, taxpayers must meet a number of requirements:
- You need to itemize deductions rather than taking the standard deduction on your federal tax return.
- Your mortgage loan has to have been taken out January 1, 2007, or later.
- The mortgage must have been used to buy or improve your primary home or second home.
- Income phaseouts apply, eliminating eligibility for the PMI deduction for higher earners. For married taxpayers filing jointly, for instance, the phaseout starts at $100,000. Every $1,000 over the cap reduces PMI deductibility by 10% until it phases out completely at $109,000 for most taxpayers. Lower income caps apply to other taxpayers using specific filing statuses.
Value of PMI Deductibility
The potential tax savings from deducting mortgage insurance premiums depends on your tax bracket and how much you pay toward PMI over the course of a year. For example, let’s look at a taxpayer earning $100,000 married filing jointly, putting them in the 22% bracket for 2021.
If they pay $4,000 per year for PMI on a $400,000 mortgage, deducting that amount would reduce their tax bill by $4,000 x 22% = $880. This average homebuyer in an ordinary tax situation would save nearly $800 on their federal income tax return by deducting mortgage insurance.
PMI Deduction Limitations
An $800 break on taxes is nothing to ignore. However, those savings won’t actually be available to everyone. A few key limitations substantially reduce the value of PMI deductibility:
- Congress has allowed the tax break to expire, so it no longer applies for tax years after 2021, significantly limiting its availability. While lawmakers could revive the deduction for future years, so far they have shown no appetite for it.
- It may not be worthwhile to go to the trouble of amending several years of past returns to claim the deduction, given the paperwork and potentially modest refund.
- The much larger standard deduction starting in 2018 also decreased the number of filers who could benefit. A large majority of filers nowadays claim the standard deduction rather than itemizing deductions. If they claim the standard deduction, they can’t use the PMI deduction.
Bottom Line
In the past, deducting private mortgage insurance offered modest but helpful tax relief to some middle-income homebuyers. Since the deduction was allowed to expire after 2021, there is currently no option for taxpayers to claim the deduction going forward. Still, there’s always the possibility that Congress will reinstate the break. And those still working on taxes for 2018 through 2021 may want to calculate potential savings from amending old returns to deduct PMI. While likely not amounting to more than several hundred dollars, for some households that refund could warrant filing the extra paperwork.
Tax Planning Tips for Beginners
- Speak with a financial advisor to learn whether you qualify to amend past returns and deduct mortgage insurance for added refunds. SmartAsset’s free tool doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s income tax calculator to get a heads-up on how much you’re likely to owe next time you file a return.
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