are mortgage insurance premiums deductible in 2021

Are Mortgage Insurance Premiums Deductible in 2021?

Many homebuyers taking out a mortgage put down less than 20% as a down payment. As a result, they are required by lenders to pay for private mortgage insurance (PMI). PMI protects the lender in case the borrower defaults on the loan. It is an extra cost on top of the monthly mortgage payment. In the past, borrowers were able to deduct PMI premiums from their taxes, which helped offset the cost. However, the deduction expired after the 2021 tax year. This article will examine the PMI tax deduction, who qualified for it, and whether it still exists for 2022.

Key Takeaways

• The mortgage insurance (PMI) deduction expired after the 2021 tax year. For eligible years, PMI was deductible only if you itemized your tax deductions.

• Most borrowers pay mortgage insurance premiums when putting down less than 20% on a home.

• To qualify for the deduction in past years, your AGI needed to be under $109,000 ($54,500 if married filing separately).

• Congress would need to extend the deduction again for it to be available in 2022 and beyond.

What is Private Mortgage Insurance?

Private mortgage insurance (PMI) is an insurance policy that protects the lender in case the borrower stops making mortgage payments. It is typically required by lenders when homebuyers put down less than 20% of the purchase price as a down payment.

PMI allows buyers to purchase a home with a smaller down payment. However, it also adds to the cost of the mortgage. PMI premiums typically cost between 0.5% to 1% of the entire loan amount per year. On a $200,000 loan, that equates to $1,000 to $2,000 extra paid by the borrower per year.

To help offset this cost, Congress previously allowed a tax deduction for PMI premiums paid. This deduction lowered the borrower’s taxable income. However, the deduction expired at the end of 2021 and is currently unavailable.

PMI Tax Deduction History

The PMI tax deduction was first introduced in 2007 through the Tax Relief and Health Care Act. It allowed borrowers who took out mortgages after January 1, 2007 to deduct PMI premiums. The deduction was available through 2010.

Congress then extended the deduction multiple times over the years:

• In 2011, it was extended 2 years through 2012.

• In 2013, it was extended through 2013 retroactively.

• In 2015, it was extended through 2016.

• In 2018, it was extended through 2017 retroactively.

• In 2020, it was extended through 2021 and retroactively reinstated for 2018 and 2019.

The deduction expired again on December 31, 2021. Currently, there is no PMI deduction available for 2022 unless Congress decides to extend it again.

Who Qualified for the PMI Tax Deduction?

When available, the PMI tax deduction had the following requirements:

• Your mortgage PMI must be for your primary residence and a deductible mortgage interest loan.

• If married and filing separately, your AGI must be $54,500 or less. For single filers or jointly filing spouses, your AGI must be $109,000 or less.

• You must itemize your tax deductions using Schedule A. You cannot claim the standard deduction.

• Your mortgage must have been originated on or after January 1, 2007.

• You can deduct PMI premiums paid or accrued during the tax year.

• The amount deductible phases out as income rises above $100,000 (for married filing jointly).

• You must allocate PMI premiums over either the loan term or 84 months, whichever is shorter.

As you can see, the deduction had strict eligibility requirements. The income limits prevented higher earners from claiming the deduction. You also had to itemize your deductions to claim it.

How Much Could You Save?

The amount of savings from deducting PMI premiums depended on your tax bracket and how much in premiums you paid. For example:

• If you paid $1,500 in premiums and were in the 12% bracket, you saved $180.

• If you paid $2,000 and were in the 22% bracket, you saved $440.

For most borrowers, the deduction saved between $100 to $500 in taxes per year. While not a huge amount, every bit of savings helped offset the cost of PMI.

Is the PMI Tax Deduction Available in 2022?

Unfortunately, no. The deduction expired at the end of 2021. It is currently unavailable for 2022 tax returns unless Congress decides to extend it again.

Borrowers taking out new mortgages in 2022 cannot deduct PMI premiums on their upcoming tax return. Furthermore, itemizing borrowers who paid PMI premiums in 2022 also cannot deduct them.

The deduction has expired and been extended numerous times over the years. It is possible Congress could revive the deduction again. However, election year politics may prevent meaningful tax legislation from advancing in 2022.

What Can You Do?

Since the PMI tax deduction has expired for 2022, here are some options for borrowers:

• See if you can cancel PMI – Once you reach 20% equity in the home, you may be able to cancel PMI and stop paying premiums.

• Ask lender about LPMI – Lender-paid mortgage insurance has the lender pay the premiums. This avoids PMI out of pocket.

• Increase down payment – Putting down 20% or more avoids PMI completely.

• See if refinancing helps – Refinancing the mortgage could possibly get you a better rate to offset higher PMI costs.

• Write/call elected officials – Contacting Congress could help encourage them to extend the deduction again.

The PMI deduction provided nice savings for eligible borrowers for many years. However, homeowners shouldn’t count on that deduction right now. Hopefully, Congress brings back this tax break in the future. In the meantime, shop around for the best mortgage deal and explore other ways to reduce PMI costs.