Home buyers who put down less than 20% at closing must buy private mortgage insurance. This can significantly increase your mortgage payment. A typical monthly private mortgage insurance payment is $100 to $200 per month for the typical $200,000 home in the US. But the good news is that mortgage insurance payments are often tax deductible, at least as of 2018.
The Tax Relief and Health Care Act introduced the private mortgage insurance deduction in 2006. Congress extended the benefit in 2015 when it passed another tax relief law. Under the terms of that law, the tax deduction expired at the end of 2016. The extension was only for one year. Since then, the US government has been renewing the tax deduction.
The private mortgage insurance tax deduction is one of the deductions that the federal government reviews every year and it will probably be addressed at some point under the recent tax reform law passed by the GOP.
Most taxpayers who claim this deduction are middle class earners; the tax deduction phases out when you get into higher income brackets. At this time, deductions for mortgage interest and real estate taxes are also still good; they have been reduced to a limit of $750,000 and $10,000 respectively, however.
If you must pay for mortgage insurance, you should still be able to tax deduct those payments for the most part, depending upon your income. This helps to ease the bite of mortgage insurance at least at tax time!
More About Mortgage Insurance and PMI
Lenders usually require private mortgage insurance to secure the debt if you stop paying the mortgage. It is charged to the home buyer who cannot make a 20% down payment. The mortgage insurance policy can be issued by a private insurance company or by the FHA, USDA or VA, if you get a loan backed by one of those US government entities.
At this time, the mortgage insurance premium deduction applies to loans that were taken out on or after Jan. 1, 2007. The insurance policy must be for a first or second home. For most people, you cannot rent out the second home; it is intended to be for vacation homes. But you might still qualify for the deduction if you treat your second home as a business asset. However, home equity loans do not qualify for this deduction. Nor do cash out refinances.
You may not claim the mortgage insurance tax deduction if your adjusted gross income is higher than $109,000, or $54,500 if you are married and you file separate tax returns. The deduction starts to go away at $100,000 for single filers, and $50,000 for married taxpayers with separate tax returns. The phase out requires that you take off 10% from the premium amounts that you paid for every $1000 that your income goes over $100,000 or $50,000.
Mortgage insurance premiums that you paid during the last tax year are reported to the IRS on Form 1098. You should get this form from your lender after the tax year closes. There is no limit on the amount of the deduction that you can claim, if you qualify.
You can deduct the entire amount, and prepaid insurance premiums may be allocated over the term of your entire loan or 84 months, whichever is shorter. Note that mortgage insurance premiums are a type of itemized tax deduction. You report them on line 13 of Schedule A.