Deduct Private Mortgage Insurance
Private mortgage insurance (PMI) is required by lenders on homebuyers who are borrowing more than 80 percent of the home’s value. With so much of the home’s value being borrowed, there is a risk to the lender not recovering all of their funds should the borrower default. Private mortgage insurance protects a lender against loss if a borrower defaults on the loan. If your loan is insured by the Department of Veteran Affairs it is known as a “funding fee” and as a “guarantee fee” if insured by the Rural Housing Service. You continue to pay for the insurance premiums until your equity exceeds 20 percent, but recent law changes allow some to deduct this expense on their federal income taxes.
Buried deep in the Tax Relief and Health Care Act of 2006 was a tax relief for those who pay PMI on their mortgage. If your mortgage originated in 2007 or after, then your PMI premiums can be deducted should you itemize your tax returns. With a premium of $100 a month, a total of $1,200 can be deducted. Should your tax rate be 25 percent, then this deduction will save you $300 a year.
To file this deduction you would record it on your Schedule A in line 13, “Mortgage insurance premiums.” When you receive your Form 1098 the amount of your PMI premium paid for the year should be listed in box 4. If not, contact the mortgage insurance issuer to determine the deductible amount.
If you make $100,000 ($50,000 if married filing separately) or more, unfortunately the amount you can deduct is reduced 10 percent for every $1,000 over, with $109,000 ($54,500 if married filing separately) being the most you can make and take advantage of this deduction. This income qualification, however, is based on your adjusted gross income (AGI) so it is your income after deducting other items such as your mortgage interest, which is represented on line 38 on Form 1040.
The tax deduction for PMI is set to expire at the end of 2011 so you can take advantage of it on your 2010 and 2011 taxes, but don’t count on it for 2012 unless Congress extends it. While it is great to have this deduction to your PMI, it actually is better to end your PMI permanently. Once you have 20 percent equity in your home, lenders will consider ending the mortgage insurance, with some required to do so when you reach 22 percent equity.
There are two ways to increase your equity to 20 percent plus, which are to pay on your loan until your principle has been paid down; or to have your home’s value increase to the point at which your equity stake hits the 20 percent mark. When you believe that you are getting close to no longer being required to pay PMI, you should contact your lender to see what paperwork they require and how you can begin the cancellation process.
If you have any questions about your PMI or your taxes, contact a mortgage insurance or tax professional.
