Mortgage insurance premiums are an unfortunate fact of life for most mortgage borrowers. If you fail to meet the terms of your mortgage contract and are unable to repay your lender as a result, mortgage insurance will step in to protect the lender from financial loss. Without it, most lenders won’t offer you a mortgage loan. Consequently, if you’re taking out a mortgage and don’t have tens of thousands of dollars set aside for the event that you can no longer repay your loan, you’ll need to purchase private mortgage insurance (PMI). However, there is some good news: Mortgage insurance premiums are tax deductible! That doesn’t mean they aren’t expensive; in most cases, they cost somewhere between 1 and 2 percent of your purchase price. Still, we’ll show you how to get the tax deduction on your premium by following these tips.
Meet the conditions for the tax deduction
Before we begin, you should note that you must pay your mortgage insurance premium in order to deduct it from your taxes. Yes, it would be great if you could somehow get the money for it and still be allowed to write it off. But the IRS is not going to let you do that. The other thing you need to know is that you must be paying a PMI that is being charged because of your purchase mortgage’s high loan-to-value ratio. That means that the insurance company is concerned that you may default on the loan and not be able to pay it back. Given those conditions, you should also be aware that you can only deduct PMI premiums paid during the first year of your mortgage. After that, the insurance company considers you to have built-up equity and will cancel the PMI. Hence, you can no longer deduct the premium.
Record keeping is key
As with most tax deductions, the first thing you should do is keep good records of the premiums you paid. If you’re deducting the PMI premiums that you paid in the current year, you’ll also want to keep a record of your mortgage payment amounts. That’s because, by law, you have to use the amount of the premiums as the deduction amount on your taxes. Since you’re not allowed to deduct the actual amount of the mortgage payment, you’ll need to know the premium amount to report it. Keep in mind that you can’t deduct PMI premiums for the year in which you close on your mortgage. You’ll also want to know that you can only deduct PMI premiums for the year in which you pay for them. That means that if you close on your mortgage on June 1, 2019, and pay your first PMI premiums on that same day, you can deduct them from your taxes as if you paid them in 2019.
Pay by check when deducting your premiums
In general, you have to write off the number of your PMI premiums on your taxes. As with most deductions, you’ll have to itemize them on Schedule A. Not only that but the amount you write off is actually reduced by 2 percent of your adjusted gross income (AGI). Given those rules, it makes sense that you don’t just deduct the amount of the premiums. That’s because your AGI is the first thing that has to be deducted as a general rule. That leaves you with less to deduct your PMI premiums. You can avoid that by paying your premium by check when you deduct it from your taxes. That’s because the amount of the check will be added to the amount you write off for your premiums.
By the way, you’ll also get an interest tax deduction
When you write off the PMI premiums that you paid, you’ll also get to write off the interest on the mortgage loan. If you’re in the 30 percent tax bracket, that means you’re saving $3 for every $1 you write off. That’s because you get a deduction for the amount of interest you paid during the year. That amount is then added to your taxable income. Since you pay taxes on your taxable income, the lower amount you have to pay will result in a larger tax refund.
As you can see, getting the mortgage insurance premium tax deduction is no walk in the park. Still, it’s an important benefit of having a mortgage loan and one that you need to take advantage of if you can. Let’s be clear; you’ll have to pay attention to the rules and keep good records to get the tax deduction. Still, doing so will reward you with a bigger tax refund and be a helpful financial advantage.