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This article was fact-checked by our editors and a member of the Credit Karma Tax® product specialist team, led by Senior Manager of Operations Christina Taylor. It has been updated for the 2020 tax year.
Private mortgage insurance may be unavoidable — and it can increase the cost of your loan. But would you feel better about paying PMI if those premiums were tax deductible?
In late 2019, Congress extended an expired tax provision that allows homeowners to deduct private mortgage insurance and other eligible mortgage insurance premiums. The tax break expired at the end of 2017, but the extension allows eligible homeowners to claim the deduction for their 2018, 2019 and 2020 federal income taxes.
Let’s look at what PMI is and how the mortgage insurance premiums deduction could apply now that Congress has resurrected it.
- What is private mortgage insurance?
- Is PMI tax deductible?
- How did the PMI deduction come back?
- What can I do now that PMI is tax deductible again?
If you get a conventional loan and have a down payment that’s less than 20% of the home’s purchase price, your lender may require you to pay for private mortgage insurance. A lender may also require you to pay for PMI if you refinance with less than 20% equity in your home. Lenders can require PMI for a number of other reasons, too.
PMI is for your lender’s benefit, not yours. It protects the lender against potential losses if you stop making mortgage payments.
You’ll typically pay PMI in monthly payments, which are added to your mortgage payment, but some lenders may allow you to pay one lump sum upfront or even a mix of both.
The cost of PMI can vary widely. For example, in Texas PMI can range from 0.5% to 6% of the original loan amount annually. The cost depends on several factors, including the type of loan, down payment amount, loan term and your credit, according to the Texas Department of Insurance. So if you borrow $200,000, your annual payments could range from $1,000 to $12,000.
PMI, along with other eligible forms of mortgage insurance premiums, was tax deductible only through the 2017 tax year as an itemized deduction. But with the passage of the Further Consolidated Appropriations Act, 2020, Congress extended the deduction through Dec. 31, 2020. That means it’s available for the 2019 and 2020 tax years, and retroactively for 2018 taxes, too. The mortgage insurance premium deduction allows you to deduct amounts you paid during the tax year or that applied to the tax year if you prepaid.
In 2017, the amount you could deduct was limited if your adjusted gross income exceeded $100,000 (or $50,000 if married filing separately). And the deduction phased out entirely for taxpayers with an AGI above $109,000 (or $54,500 for married couples filing separately).
What is adjusted gross income?
Adjusted gross income is your gross income (all the income you receive in a year) minus adjustments. AGI is the basis for calculating your taxable income, which in turn determines your tax bracket and tax rate. Learn more about AGI.
In January 2019, Rep. Julia Brownley, D-Calif., introduced a bill to the House of Representatives called the Mortgage Insurance Tax Deduction Act of 2019. The bill proposed to not only extend the mortgage insurance premium deduction permanently but also to apply it retroactively to the 2018 tax year.
Another bill introduced in the Senate, called the Tax Extender and Disaster Relief Act of 2019, proposed to treat mortgage insurance premiums as qualified mortgage interest through the 2019 tax year.
But the bill that actually extended the deduction is the Further Consolidated Appropriations Act, 2020, introduced by Rep. Bill Pascrell Jr., D-N.J., in March 2019, and signed into law on Dec. 20, 2019.
Congress extended the deduction retroactively to cover 2018, along with 2019 and 2020. So if you qualify for the deduction in 2018, you might be able to file an amended return to claim the deduction and its savings. The same goes if you qualify for the 2017 deduction — you can amend federal tax returns within three years from the date of a timely filing of the original return or within two years after you paid the tax owed, whichever is later.
But keep in mind that even if you do qualify for the deduction, it may not make sense to take it. You can only take the PMI deduction if you itemize your deductions. And if your total itemized deductions are less than the standard deduction amount for your filing status, you’d likely save more by taking the standard deduction instead.
Deductions can be a useful way to help reduce your tax bill. And although the deduction for private mortgage insurance originally expired at the end of 2017, Congress has extended it for the 2018, 2019 and 2020 tax years.
To find out if you qualify for the deduction, check your AGI from your tax returns for prior years and run some numbers to determine if your itemized deductions exceed your standard deduction. If you qualify for the 2018 deduction and it makes sense to take it, you may consider filing an amended return to take advantage for 2018.
And don’t forget to investigate other valuable tax breaks related to homeownership, like the mortgage interest deduction.
Relevant sources: IRS: Publication 939 — Home Mortgage Interest Deduction | CFPB: What Is Private Mortgage Insurance? | U.S. Congress: H.R.284 — Mortgage Insurance Tax Deduction Act of 2019 | Texas Department of Insurance: Private Mortgage Insurance (PMI) | IRS: Instructions for Schedule A | IRS: Amended Returns & Form 1040X
Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.