One of the largest advantages of owning a home is the deductions you can take on your tax returns. Oftentimes, homeowners can deduct thousands of dollars on their taxes. Understanding what is tax deductible and what isn’t can help you make the most of your situation. One thing many people overlook is the fact that PMI is a tax deduction.
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When Do You Pay PMI?
Any borrower pays PMI on loan amounts, which exceed 80% of the home’s value. If you took out only one loan for 95%, for example, you pay PMI. If, however, you took out two loans, a first for 80% and a second for 15%, you do not pay PMI. It is only on a first mortgage higher than 80% of the value of the home.
PMI is Like an Interest Tax Deduction
This year, you can deduct PMI as you would an interest tax deduction. In fact, you deduct the premiums as if they were interest. This helps to lessen your tax liability. It is not a direct credit, however. It is a deduction. This means the amount you can deduct comes directly off your income, reducing your adjusted gross income. This is the number the IRS uses to figure your tax liability.
The Maximum Income Allowed
There are certain restrictions when it comes to deducting PMI on your taxes, though. For instance, borrowers with an adjusted gross income higher than $100,000, cannot deduct the full amount of the PMI they paid. If your adjusted gross income is higher than $109,000, you cannot deduct PMI at all. The deduction is meant for the middle-of-the-road income earners.
If you make more than $100,000, whether you are single or married, the amount you can deduct decreases by 10% for every one thousand dollars. For example, if your adjusted gross income equals $105,000, you can only deduct 50% of the PMI you paid for the year.
In order to take advantage of the PMI deduction, you must itemize your deductions on your taxes. This is the same as it is for the interest deduction. In fact, you deduct PMI in the same place on Schedule A. In the section where you deduct the interest, you will find a section titled “PMI Deduction.” This is where you enter the amount and your deduction is calculated.
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The Last Year
The PMI deduction began in 2007. This was when homeowners could deduct the premiums they paid. It was originally a part of the Tax Relief and Health Care Act of 2006. It was not meant to be a long-term deduction, but since the industry is still recovering, the deduction still exists. As of right now, though, 2016 will be the last year you can take advantage of it. If it is to continue, Congress must approve it.
The Additional Requirements
There are some additional requirements you must meet in order to take the tax deduction for PMI. The most important requirement is the date you took out the loan. The deduction is not applicable on any loans prior to January 1, 2007. In addition, if you refinanced during that time, the PMI you can deduct is only the loan amount for the initial outstanding principal. If you took any cash out of the equity of your home, you cannot deduct the PMI on that money.
If you have a second home, you may be able to deduct the PMI you pay on that home as well. This is true as long as you use the home for your own use. It could be a second home or a vacation home. If it is an investment home, however, it is not eligible for the deduction.
While it might be disappointing that the PMI tax deduction may go away after this year, remember you can cancel PMI. As soon as your loan is less than 80% of the value of the home, you no longer have to pay this insurance premium. It is up to you to determine when this happens, though. The lender is not required to automatically cancel your PMI until the LTV hits 78%. This could leave you paying unnecessary insurance premiums for a while.
There are several ways for you to cancel your PMI. You can pay for a new appraisal if you think the value of your house increase recently. This helps you to cancel PMI faster. While you won’t have the tax deduction any longer, you will save a lot more by not paying the premium any longer. If you want to take care of it faster, you can also refinance your loan. As long as you use a rate/term refinance, rather than taking cash out of the equity of your home, you may be able to cancel PMI faster.
Paying PMI might seem like a pain, but it has its advantages. First and foremost, it makes it possible for you to purchase a home. Without PMI, you might not be eligible for such a high LTV. Secondly, it gives you a break on your tax liability. In today’s day and age, tax deductions are hard to come by, making the PMI deduction worth quite a bit. Even if you only save a few hundred dollars on your taxes, every penny helps when you are trying to save money!