The last year that the tax deduction for private mortgage insurance (PMI), also known as mortgage insurance premium (MIP), was allowed was for tax year 2017—but only for mortgages taken out or refinanced after Jan. 1, 2007. Note that the Further Consolidated Appropriations Act of 2020 allows MIP and PMI tax deductions for 2020 and retroactively for 2018 and 2019.
Initially, this deduction for premiums expired on Dec. 31, 2017 due to the Tax Cuts and Jobs Act of 2017. The Further Consolidated Appropriations Act extended the deduction through Dec. 31, 2020. This made the deduction available for the 2019 and 2020 tax years, and retroactively for 2018 taxes.
If certain requirements were met, mortgage insurance premiums could be deducted as an itemized deduction on your return. If your adjusted gross income (AGI) is $109,000 or more for the year, this deduction is not allowed. This also holds true for married people filing separately, for whom the adjusted gross income limit is $54,500. The PMI tax deduction is no longer allowed for tax year 2018, but that could change.
PMI Tax Deduction: Legislation Timeline
The Tax Relief and Health Care Act first introduced the deduction for mortgage insurance back in 2006. In 2015, Congress extended the deduction with the Protecting Americans from Tax Hikes (PATH) Act, but the deduction expired on December 31, 2016. The extension was good for only one year.
Congress then stepped in again. The Bipartisan Budget Act of 2018 extended the mortgage insurance premiums deduction retroactively again through 2017. On January 8, 2019, California Representative Julia Brownley introduced the Mortgage Insurance Tax Deduction Act of 2019, which would make the mortgage insurance deduction a permanent part of the tax code and would apply retroactively to all amounts paid or accrued since December 31, 2017. Most economists expect this fairly bipartisan legislation to make it through committees and be approved by congress.
How Much Could the PMI Deduction Save a Taxpayer?
It depends on how much you owe and your tax bracket, but a good rule of thumb is that you’ll pay $50 a month in premiums for every $100,000 of financing. Keep in mind, though, that the amount of the down payment, type of loan, and lender requirements can all affect your actual cost.
For example, if someone puts 5% down on a $200,000 house, they’ll pay monthly PMI premiums of about $125. Increase your down payment to 10%, and you’ll pay less than $80 a month.
So how does this affect your tax bill? Imagine someone's adjusted gross income is $100,000. You bought a $200,000 house, put down 5%, and paid $1,500 in PMI premiums ($125 times 12 months). The deduction for PMI cuts your taxable income by $1,500. If you’re in the 12% tax bracket, you save $180 on your tax bill ($1,500 x 12%), and if you’re in the 22% tax bracket, you save $330 ($1,500 x 22%).
You must allocate the insurance premiums over the shorter of the stated term of the mortgage or 84 months, beginning the month the insurance started. Suppose you take out a 15-year mortgage that begins in July of the current year. At the beginning of the loan, you prepay all of the required mortgage insurance for the term of the loan, in this case, $8,600.
Deduction = ($8,600 / 84) x 6 months = $614.29
If your income is less than the maximum allowed, you can deduct the above amount for the year.
A step better than a tax deduction, getting rid of PMI altogether is even nicer. A homeowner can cancel PMI when they have 20% equity in your home.
Origins of Mortgage Insurance Tax Deduction
This tax deduction originated as part of the Tax Relief and Health Care Act of 2006 and was initially applied to private mortgage insurance policies issued in 2007. In response to the slow recovery in the housing market, the Protecting Americans from the Tax Hikes Act of 2015 extended the deduction to 2016. It is unknown if this extension will apply to future tax years, as Congress must directly approve it.
The mortgage insurance deduction was found on Schedule A on tax returns on line 8d. The amount one entered in this section was found in box five of the Form 1098 sent by the lender.