Mortgage Insurance Tax Deductions

MI Tax Deductions with Mortgage Mark
Mortgage Insurance (MI) can be tax deductible but unlike Mortgage Interest Tax Deductions, MI deductions are dependent on the household’s adjusted gross income. Note: Mortgage Insurance should not be confused with Homeowner’s Insurance or with any life insurance products. MI is insurance that protect the lender, not the homeowner.

There are various Types of Mortgage Insurance – such as monthly MI, single paid MI, and split premiums – and all MI types are eligible for the tax deduction with two exceptions: 1) MI paid on investment properties, and 2) MI paid on cash-out refinances transaction. Borrower-paid Mortgage Insurance that was acquired in 2007 or later can be tax deductible through 2016 on all loan program types secured by a primary residences and/or second home. This deduction is available is for all purchase and refinance loans but there is a catch: there are income restrictions.

INCOME RESTRICTIONS

The MI tax deduction is based on a household’s Adjusted Gross Income (line 38 on the 1040 tax return) and the MI deduction is allowed if your Adjusted Gross Income (AGI) does not exceed $109,000. The PMI deduction begins to phase out once your AGI surpasses $100,000 (or $50,000 for married couples filing separately) and is removed completely with an AGI more than $109,000 (or $54,500 for married couples filing separately).

Example: if household AGI is $101,000 then 90% of the MI is deductible; if the AGI is $102,000 then 80% is deductible; etc..

If your AGI ranges between $100,000 and $109,000, you can use a worksheet included with Schedule A of your income tax form to determine how much you can deduct from your taxes. Borrowers with an AGI less than $100,000 can deduct 100% of the PMI premiums.

Note: if you own the property jointly, or if another person paid a portion of the insurance premiums, you can claim only the amount that you paid.

Government Loans

FHA, VA, and USDA loans all have “mortgage insurance” that can be fully deducted in the year the loan was originated. FHA has an Up Front MIP (and Monthly MIP), VA has a Funding Fee, and USDA has a Guarantee Fee and all are allowed to be fully deducted in the year paid – even if they were rolled into the loan.

Conventional Single Paid MI

For conventional loans that included a Single-Paid MI premium, that amount must be deducted over 84 months (or the life of the loan – whichever is shorter). The catch is that each year the borrower’s income must still meet the requirements for each year of the deduction.

Example: Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. Ryan’s adjusted gross income (AGI) for 2012 is $76,000. Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months).

IRS Tax Code

For those of you that can’t sleep, here are the details on why you can deduct the MI. #Boring. In 2007 deducting your MI was allowed through the Tax Relief and Health Care Act; however, because the housing market had been slow to recover from the 2008 housing crisis, the tax break had been extended through to 2013. 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 for that year. And finally, thanks to the Protecting Americans from Tax Hikes Act of 2015 (PATH), Borrower-paid Mortgage Insurance that was acquired in 2007 or later can be tax deductible for 2015 and 2016. Visit IRS Publication 936 for more details relating to mortgage interest tax deductions.

MORTGAGE INSURANCE TAX DEDUCTION

Like the Mortgage Interest Tax Deduction, borrower-paid Mortgage Insurance that was acquired after 2006 can be tax deductible for 2013 on all loan program types secured by a primary residences and/or second home so long as the borrower meets certain income restrictions. There are various types of Mortgage Insurance options – such as monthly MI, single paid MI, and split premiums – and all MI types are eligible for the tax deduction. Check out our page on Mortgage Insurance for more details on the various types of MI. MI paid on investment properties and MI paid on cash-out refinances transaction are NOT tax deductible.

GOVERNMENT LOANS: FHA, VA, and USDA loans all have “mortgage insurance” that can be fully deducted in the year the loan was originated. FHA has an Up Front MIP (and Monthly MIP), VA has a Funding Fee, and USDA has a Guarantee Fee and all are allowed to be fully deducted in the year paid – even if they were rolled into the loan.

 

INCOME RESTRICTIONS

The MI tax deduction is based on a household’s Adjusted Gross Income (line 38 on the 1040 tax return) and does phase out after certain thresholds. The chart below outlines the income limitations and the percentage of MI that can be deducted.

SINGLE PAID MI

For conventional loans that included a Single-Paid MI premium, that amount must be deducted over 84 months (or the life of the loan – whichever is shorter). The catch is that each year the borrower’s income must still meet the requirements for each year of the deduction.

Example. Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. Ryan’s adjusted gross income (AGI) for 2012 is $76,000. Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months).

 

Please consult your tax professional for tax advice regarding Mortgage Insurance Tax Deductions.