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What Is the Mortgage Insurance Premium Deduction?

This deduction could save you hundreds of dollars -- if you qualify.

Apr 16, 2021 by Matt Frankel, CFP
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The mortgage insurance premium deduction allows certain taxpayers to deduct the mortgage insurance premiums, or MIP, they paid for a particular tax year. Mortgage insurance is a common requirement on loans guaranteed by the Federal Housing Administration (FHA mortgage insurance) and is also typically required on conventional mortgages in situations where the borrower pays less than 20% of the purchase price as a down payment, known as private mortgage insurance or PMI.

While the mortgage insurance premium deduction can save certain taxpayers hundreds of dollars on their tax bills each year, there are some specific criteria that need to be met in order to use it. Plus, the availability of the mortgage insurance tax deduction beyond the 2020 tax year isn't certain. In this article, we'll take a look at the details of the mortgage insurance premium deduction and what it could mean for you.

Can you use the mortgage insurance premium deduction?

Just because you paid PMI or another type of mortgage insurance doesn't necessarily mean you can deduct it on your taxes.

In order to deduct your qualified mortgage insurance, two things need to be true. You need to itemize deductions on your tax return, and your adjusted gross income (AGI) needs to be under a certain threshold.

We'll start with itemizing deductions. Ever since the Tax Cuts and Jobs Act went into effect for the 2018 tax year, the standard deduction has gone up, while the number of available itemized deduction options have decreased. For most taxpayers, itemized deductions are limited to mortgage interest, medical expenses over a certain percentage of AGI, charitable contributions, and up to $10,000 in state and local taxes.

Here's a look at the standard deductions for the 2020 and 2021 tax years:

Tax Filing Status 2020 Standard Deduction 2021 Standard Deduction
Single $12,400 $12,550
Married Filing Jointly $24,800 $25,100
Head of Household $18,650 $18,800
Married Filing Separately $12,400 $12,550

Data source: IRS.

Here's the point: Let's say you're married and file a joint return. Unless your itemizable deductions for 2020 are greater than $24,800, itemizing isn't worthwhile.

Further, in order to deduct all of your mortgage insurance payments, your adjusted gross income, or AGI, needs to be less than $100,000. This is the same for all filing statuses except "married filing separately," which has a cap of $50,000. Above these thresholds, taxpayers lose 10% of the deduction until it disappears completely above AGI of $109,000 and $54,500, respectively.

The key takeaway is that most taxpayers use the standard deduction. And a disproportionate amount of those who itemize have incomes over the $109,000 AGI threshold to be able to use the deduction. So, the short answer is that unless your total itemizable deductions are less than your applicable standard deduction and your adjusted gross income is under $109,000, you won't be able to deduct the mortgage interest on your primary home.

A note for investors

It's worth pointing out that real estate investors may be able to deduct their mortgage insurance premiums, even if they don't meet the qualifications discussed earlier. In the case of a rental property, mortgage insurance premiums can typically be deducted on Schedule E. However, it's important to note that the vast majority of rental property mortgages don't have PMI, as it is very difficult to find a rental property loan with less than 20% down.

Will the mortgage insurance premium deduction go away?

The short answer is "maybe." The mortgage insurance deduction is one that needs to be renewed by Congress often. Most recently, the deduction was renewed for the 2019 and 2020 tax years and retroactively renewed for the 2018 tax year.

So, for the deduction to be available for the 2021 tax year (the return you'll file in 2022), Congress will need to extend the deduction. So far, the deduction has ultimately been extended for every tax year since it was originally implemented, but it's not a guarantee by any means.

The Millionacres bottom line

As you can see, there are some pretty specific restrictions that apply to the mortgage interest premium deduction. However, if you qualify, this deduction could help reduce your tax burden by hundreds of dollars each year.

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