You can claim PMI on taxes if you meet the qualifications set forth by the Internal Revenue Service (IRS) to do so. Private mortgage insurance (PMI) is insurance that the lender requires the home buyer to purchase when not placing a high enough down payment on the property being financed. The insurance is paid by the buyer and is for the benefit of the lender. If the borrower defaults on the mortgage and the property goes to foreclosure for nonpayment the insurance covers the risk of the lender. As a general rule, a lender will ask you to carry the insurance if you do not put at least 20% of the total value of the property as a down payment. Even though the insurance will not benefit you in the long run, you may be able to deduct the amount of the premium from your income tax returns at the end of each tax year that you pay the premiums.
There are several forms of insurance like private mortgage insurance. Both the Veteran’s Administration (VA) loans and the Federal Housing Administration (FHA) loans have a similar insurance premium that is charged on notes that they carry. All of these premiums can be claimed as deductible on your tax return. Sometimes a lender will require that you prepay your PMI premiums. If that is the case you can claim PMI on taxes only for the year in which you actually paid the costs.
There are some restrictions before you can claim PMI on taxes. The IRS allows only those filers who took out a mortgage after the year 2006 and paid premiums for the insurance to claim these expenses as deductibles on their return. If your mortgage was initiated prior to 2006 you cannot file the expense as a deduction on your personal tax return. There is an income earning restrictions as well. If you exceed the limit of adjusted gross earnings you will be unable to claim the deductible. If you are any filing status other than married filing separately, then you can earn up to $100,000 adjusted gross income. If you are married filing separately then you can earn no more than $50,000 for adjusted gross income.
You should receive a Form 1098 from your lender just after the close of the tax year. The lender is required to mail you this form and to include on the form the amounts that you paid that can be claimed on your income tax return. The PMI is reported on box 4 of the form. You will have to file the long form, or IRS Form 1040. You cannot claim a deduction if you file the shorter IRS Form. You must use IRS Form Schedule A to report the deductible. Find line 13 on Schedule A and put the amount that is listed in Form 1098 from your lender on this line. Be sure that you are claiming the deduction for the appropriate tax year. All the deductibles added together on the Schedule will lower your income that will be taxed for that year.
You will need to have more total itemized deductions listed on your Schedule A than the IRS allows for the standard deduction for your filing class. Find the amount of the standard deduction that you are allowed. Total up the deductions that you have listed on Schedule A. Compare these two figures. The Schedule A amount must be greater than the standard deduction amount in order for you to use the Schedule A figures. You can determine the amount you save by claiming PMI on your taxes by simple multiplication. Here’s an example: $700 (PMI paid) X 28% (your tax rate) = $196 savings. As you can see, you can claim PMI on your taxes if you are eligible and you can receive the benefit of lower taxes paid.