PMI May Be Tax Deductible

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The federal government is allowing a  tax break for private mortgage insurance on loans obtained in 2007.

If you obtain(ed) a new home loan with private mortgage insurance in 2007 or thereafter, you might be able to deduct the cost of the insurance on your federal income tax return. The rules are just as complicated as most other tax laws, so you should consult a qualified tax professional for guidance on your individual situation.

Who benefits from tax deduction?
If you and your spouse file a joint tax return and have adjusted gross income (AGI) of no more than $110,000 or if you file an individual tax return and have AGI of no more than $55,000, you may be able to deduct 100 percent of the PMI you paid. You’ll need to itemize your tax deductions to take advantage of this benefit.

There is no cap on the amount of paid PMI that you can deduct; however, the deduction is reduced by 10 percent for each additional $1,000 of AGI. That means if you and your spouse file a joint tax return and have AGI of $110,000 to $120,000 or if you file an individual return and have AGI of $55,000 to $60,000, you may be able to take a partial deduction.

The deduction is allowed for both purchase-money and refinance mortgages, but there is a gray area as to whether PMI paid for the cash-out portion of a refinance would be deductible. If you obtain a refinance loan with cash out and PMI in 2007, you’ll need to consult a tax professional for advice.

Your lender or loan servicer  may report the annual amount of PMI you paid on the same year-end form that’s used to report annual mortgage interest or another form. This report is required only if the total PMI is more than $600.

Rethink  PMI or  piggyback (second loan)  equation
The PMI deduction is currently allowed for mortgages that closed between Jan. 1, 2007 and thereafter. Borrowers may still benefit from the two-loan option.

Either way, individual circumstances such as how long you plan to keep your mortgage and own your home, your ability to qualify for two loans, the purpose and type of your second loan, and your personal tolerance for risk, among other factors, may be more important than the tax benefit of the PMI deduction. Be sure to weigh all of the relevant factors before you make your decision.

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