Taxes & Your Home: Deducting Private Mortgage Insurance (PMI)

Sticking with the theme, here's an article by Miranda Marquit.

One of the tax deductions that many homeowners have been happy to take since 2007 has been the deduction for the premiums paid for Private Mortgage Insurance (PMI). The tax deduction was slated to expire at the end of 2010, but the tax package passed by Congress last December extended it through 2011. That means that you still have this year to claim PMI payments as a deduction on Schedule A of your Form 1040. (Yes, you have to itemize to take this deduction.)

What is PMI?
Private Mortgage Insurance is designed to protect lenders in the event that you default. You pay mortgage insurance premiums in order to help the lender recoup losses if you stop making payments. Most lenders require borrowers to purchase PMI if you don’t make a 20% down payment on the home.

PMI payments change each year, accounting for a percentage of the outstanding balance. The annual premium is usually 0.5% to 0.75% of the remaining balance. So, if you have a remaining balance of $150,000 on your home, your annual premium would be between $750 and $1,125 a year. That amount is usually divided by 12 and added to your monthly mortgage payment. When you reach the point where you have 20% equity in your home, you no longer have to keep making PMI payments.

Taking the PMI Tax Deduction
If you have been paying premiums, they are deductible on Schedule A when you itemize instead of taking the standard deduction. In order for your home to qualify, though, it has to have been bought after January 1, 2007. The PMI deduction only applies to mortgages made in the year 2007 and after. The mortgage also must be secured by your home.

If you are paying PMI on a mortgage not used for your home purchase, it must have been taken to “substantially improve” your home – so some home equity loans are eligible. The PMI deduction can also be used on one second home in addition to your primary residence.

Realize, though, that there are income limits to taking the PMI deduction. There are no dollar limits on the deductible amount, but if your adjusted gross income reaches a certain level, you cannot take the deduction. For every $1,000 of your adjusted gross income above $100,000, you have to reduce your deduction by 10%. Once your adjusted gross income reaches $109,000, you are no longer eligible for the deduction. This is another deduction aimed at helping middle class homeowners.

So, if you paid PMI in 2010, you can deduct it on your tax return this year, if you itemize. Additionally, what you pay in tax year 2011 can be deducted on next year’s tax return. However, after the end of 2011, you will no longer be able to deduct your PMI payments – unless the deduction is extended again. Be sure to consult with a tax professional before taking any credit or deduction on your tax return. You want to make sure that you are eligible for any tax breaks that you take.


Here's a direct link to the story.

http://blog.lendingtree.com/blog/2011/03/22/pmi-deductio/