When you think of all of the costs associated with purchasing a home – the down payment, legal fees, closing costs, moving expenses – it’s not a financial endeavor to take lightly. If you obtained a mortgage that was for 80% or more of your home’s purchase price, then you most likely needed to purchase Private Mortgage Insurance (PMI) as well.
PMI is a way for mortgage lenders to protect themselves in the unfortunate event that a client can no longer make their mortgage payments and defaults on their loan. In essence, you are viewed at that time as a riskier investment, and the PMI helps to mitigate this risk.
Your PMI payment is usually included as part of your overall mortgage payment. But there are silver linings in regards to your PMI. For example, once you have paid enough towards your principal to cover the accepted 20% level, you can ask your lender to remove the PMI fee.
But there’s more. Is PMI tax deductible on your primary residence? In 2007, deducting your private mortgage insurance was allowed through the Tax Relief and Health Care Act and applied to PMI policies in that year. However, because the housing market had been slow to recover from the 2008 housing crisis, the tax break had been extended through to 2013. Keep in mind that your homeowner’s insurance is not tax deductible.
On December 19, 2014, legislation in the form of the Tax Increase Prevention Act was passed by Congress to continue to allow PMI tax breaks for qualified borrowers.
Is PMI tax deductible for everyone? Not necessarily. You need to meet the following qualifications to be eligible for the PMI deduction:
To claim a PMI deduction on your taxes, you need to itemize your deductions on Schedule A which is included with IRS Form 1040 when you file your income tax return. If you have prepaid any of your PMI, you are not allowed to deduct all of your prepayments in the year that you paid them; instead, you are required to wait to make the PMI deductions in the tax year that each premium covers.
There are many considerations in determining if your PMI is tax deductible. If unsure, review forms and information from the Internal Revenue Service to see if you qualify for the current tax year. If you still cannot determine your eligibility or need help in calculating the amount of your deduction, consult a financial professional who can help you save the most money on your taxes. Having more money in your pocket – who wouldn’t want that?