Home owners who are eligible to deduct private mortgage insurance, or PMI, premiums can shave hundreds of dollars off their income tax bills.
If you put down less than 20% on a home, expect to be required to purchase private mortgage insurance, which protects the lender in the event you default on your home loan. That’s a good deal for the lender, considering you’re the one paying the PMI premiums for the protection.
Don’t pay the insurance a day longer than you must, however. Canceling PMI as soon as you’re entitled can save you thousands of dollars. For eligible home owners, deducting the premiums come tax time can save hundreds more.
Getting the PMI tax deduction
Starting with loans issued or refinanced in 2007, and continuing through 2013, you can deduct each year’s premiums paid on PMI for your principal residence and for a non-rental second home. The tax break was originally good for 2007 only, but the government keeps extending it.
The deduction begins to phase out once your adjusted gross income reaches $100,000 ($50,000 for married filing separately) and disappears entirely at an AGI of $109,000 ($54,500 for married filing separately). In general, you can only deduct the premiums paid for the current tax year. If you pre-paid premiums for future years, that portion must be allocated to those future years. Rules can vary for mortgage insurance provided by the Federal Housing Administration, Department of Veterans Affairs, and Rural Housing Service, so consult a tax adviser.
To claim the PMI deduction, you must itemize you return. Enter qualified PMI premiums on Line 13 of Schedule A. The IRS instructions for Schedule A include a worksheet for home owners subject to the income phase-out. Basically, you’ll lose 10% of the deduction for each $1,000 over the $100,000 AGI limit you are.
How much can you save?
PMI premiums on a median priced home ($198,100 in 2008) run between $50 and $100 per month. A good rule of thumb is $50 a month for every $100,000 of financing. The amount of the down payment, type of loan, and lender requirements can all affect the actual cost.
There are many online PMI calculators that will help you estimate your premium based on various assumptions. Put 5% down on a $200,000 house, for example, and you’ll pay monthly PMI premiums of about $125. Increase your down payment to 10%, and you’ll pay less than $80 a month.
How does all of this affect your tax bill? Let’s say a married couple filing jointly with an AGI of $100,000 bought a house on Jan. 1, 2009, for $200,000. They put down 5%. By the end of 2009 they paid $1,800 in PMI premiums ($150 times 12 months). By reducing their $100,000 AGI by $1,800, they lower their tax liability by $438.
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