Mortgage insurance is an extra cost that many homebuyers must pay when taking out a mortgage with a down payment of less than 20%. While it provides protection for the lender in case of loan default, it adds to the borrower’s monthly mortgage expenses. However, one potential benefit is that mortgage insurance may be tax deductible, allowing homeowners to reduce their taxable income.
This article explains whether mortgage insurance is tax deductible, eligibility criteria, how to claim the deduction, and other financial implications.
Understanding Mortgage Insurance
Mortgage insurance is typically required when a borrower finances more than 80% of a home’s purchase price. The two main types of mortgage insurance are:
- Private Mortgage Insurance (PMI) – Required for conventional loans when the down payment is less than 20%.
- Mortgage Insurance Premium (MIP) – Required for FHA loans, regardless of the down payment amount.
Other forms of mortgage-related fees include:
- USDA Loan Guarantee Fees – Required for loans backed by the U.S. Department of Agriculture.
- VA Loan Funding Fees – Required for loans backed by the U.S. Department of Veterans Affairs.
The key question is whether these payments can be deducted on your tax return.
Is Mortgage Insurance Tax Deductible?
Yes, mortgage insurance premiums can be tax deductible under certain conditions. The Mortgage Insurance Tax Deduction was introduced in 2006 under the Tax Relief and Health Care Act and has been periodically extended by Congress.
As of 2021, the deduction was available, but the future of the deduction depends on tax laws passed by Congress. Homeowners should check with a tax professional or review IRS guidelines to confirm if the deduction is still in place for the current tax year.
Types of Mortgage Insurance Eligible for Deduction
The mortgage insurance tax deduction applies to:
- Private Mortgage Insurance (PMI) for conventional loans.
- Mortgage Insurance Premiums (MIP) for FHA loans.
- USDA Loan Guarantee Fees.
- VA Loan Funding Fees.
This means that if you paid any of these fees, you may be able to claim them as a tax deduction.
Who Qualifies for the Mortgage Insurance Tax Deduction?
Not all homeowners can deduct mortgage insurance premiums. To qualify, you must meet several criteria:
1. Income Limits
- The deduction phases out for taxpayers with an adjusted gross income (AGI) above $100,000.
- If your AGI is between $100,000 and $109,000, the deduction is gradually reduced.
- If your AGI is $109,000 or higher, you cannot claim the deduction.
- For married individuals filing separately, the income limit is $50,000 to $54,500.
2. Itemizing Deductions vs. Standard Deduction
- To claim mortgage insurance as a deduction, you must itemize deductions on Schedule A (Form 1040).
- If you take the standard deduction, you cannot deduct mortgage insurance premiums.
- The standard deduction increased significantly under the Tax Cuts and Jobs Act (TCJA) of 2017, meaning fewer people itemize their deductions.
3. Loan Requirements
- The loan must be for your primary residence or a second home (not for rental or investment properties).
- The mortgage must have been taken out after 2006 to qualify.
How to Claim the Mortgage Insurance Deduction
If you are eligible, follow these steps to claim the mortgage insurance tax deduction:
Step 1: Check Form 1098
- Your mortgage lender will send you IRS Form 1098 (Mortgage Interest Statement) in January.
- This form includes the amount of mortgage insurance premiums paid for the previous year.
Step 2: Itemize Deductions on Schedule A (Form 1040)
- You must itemize deductions instead of taking the standard deduction.
- Enter your mortgage insurance premiums on Line 8d of Schedule A.
Step 3: Adjust for Income Limits
- If your AGI is between $100,000 and $109,000, reduce the deduction based on IRS guidelines.
Step 4: File Your Taxes
- Use tax software or consult a tax professional to ensure you correctly claim the deduction.
How Much Can You Save with the Mortgage Insurance Deduction?
The exact savings depend on:
- The amount of mortgage insurance paid.
- Your tax bracket.
- Whether you itemize deductions.
Example Calculation
- Home price: $300,000
- Loan amount (90% financing): $270,000
- PMI rate: 1% annually
- Annual PMI cost: $2,700
- Tax bracket: 22%
If you qualify for the full deduction:
- Tax savings = $2,700 × 22% = $594
This means you would reduce your taxable income by $2,700, resulting in a tax savings of $594.
Other Mortgage-Related Tax Deductions
Even if you don’t qualify for the mortgage insurance deduction, you might still benefit from other homeownership tax deductions, such as:
1. Mortgage Interest Deduction
- Deduct interest paid on loans up to $750,000 for homes purchased after December 15, 2017.
- For homes purchased before that date, the limit is $1 million.
2. Property Tax Deduction
- Deduct up to $10,000 ($5,000 for married filing separately) in state and local property taxes.
3. Mortgage Points Deduction
- If you paid discount points to lower your mortgage interest rate, you may be able to deduct those costs.
Conclusion
Mortgage insurance can be tax deductible, but not all homeowners qualify. The deduction applies to PMI, MIP, VA funding fees, and USDA guarantee fees, but income limits and itemized deduction rules apply.
Key Takeaways:
✅ Mortgage insurance is deductible if your AGI is below $100,000.
✅ You must itemize deductions on Schedule A (Form 1040).
✅ If eligible, you can reduce taxable income, leading to lower taxes.
✅ The deduction phases out for AGIs between $100,000 and $109,000.
✅ If you take the standard deduction, you cannot deduct mortgage insurance.
If you are a homeowner paying mortgage insurance, it’s important to review tax laws each year, as Congress frequently adjusts these rules. Consulting a tax professional can help you maximize your tax savings and ensure you claim all available deductions.