June 29, 2018
June 29, 2018
When you buy a home, there are always more costs than you expected. It’s not just about the payment and interest you have on a monthly basis. It’s also about homeowners insurance and property taxes.
Another thing to consider is that you might have to pay private mortgage insurance (PMI). If you don’t put at least 20% down on your home, your lender will require you to pay PMI. It’s a way for the lender to protect itself against the possibility that you default on your loan.
PMI can be an added expense. But the good news is that private mortgage insurance is tax-deductible — at least for now.
The tax deduction for private mortgage insurance appeared for tax year 2007. It was designed to give homeowners a break during the financial crisis. However, the tax break has been extended through tax year 2016. This means that if you got a mortgage, or refinanced your home, since January 1, 2007, you could be eligible for the PMI tax deduction.
You should also be aware that the PMI tax deduction only applies to a home that is your primary residence or a second property that you aren’t renting. This tax deduction isn’t designed for investment or rental properties that you have. You can claim other deductions for those types of properties, depending on your situation.
To claim the PMI tax deduction, you need to itemize using Schedule A. You can see the spot in the “Interest You Paid” section of Schedule A on Line 13. You can see the amount you can claim by looking at Box 4 of the Form 1098 sent by your lender. This Form 1098 should include information about mortgage interest and other tax-deductible information about buying your home.
It’s important to look at your deductions to see if itemizing makes sense. Depending on your other itemized deductions, it might not make sense to deduct the PMI you paid. However, if there are enough deductions on Schedule A to amount to more than the standard deduction, you should consider itemizing. Your PMI can be a part of that calculation.
Like so many tax deductions, the PMI deduction comes with income phaseouts. If your adjusted gross income (AGI) reaches at least $100,000, you will start to see a phaseout in the amount you can claim for your deduction. Your phaseout starts at $100,000 if you are single, filing jointly, or head of household. If you are married filing separate returns, the phase-out starts at $50,000 AGI.
For each $1,000 your income is over the AGI limit, your PMI deduction is reduced by 10%. That means that if you make $105,000, the deduction is reduced by 50%. By the time most homeowners reach $109,000, the deduction has pretty much disappeared. Make sure you carefully check your situation to make sure you are claiming the PMI deduction correctly.
When you get FHA and USDA loans, you aren’t paying PMI. However, you do end up paying mortgage insurance when you don’t have 20% down. The good news is that you can qualify for a tax break for mortgage insurance paid through these government programs. The same rules apply, so make sure you are in compliance.
If you have been paying PMI, you have the chance to deduct some of what you pay on your taxes. This is one way to help lower your taxable income and reduce your tax bill as a result. Take a look at your situation and consult with a tax professional to see if claiming this tax deduction makes sense for you.