IS MORTGAGE INSURANCE TAX DEDUCTIBLE?

If you are a homeowner, you probably know that mortgage insurance can be an additional expense that comes with a home loan. Mortgage insurance is designed to protect the lender in case you default on your loan. But did you know that mortgage insurance can also affect your taxes? In this article, we’ll discuss whether mortgage insurance is tax deductible and how it can affect your tax return.

WHAT IS MORTGAGE INSURANCE?

Mortgage insurance is a type of insurance that protects lenders if a borrower defaults on their loan. This insurance is typically required if the borrower puts down less than 20% of the purchase price of the home. There are two types of mortgage insurance: private mortgage insurance (PMI) and government mortgage insurance (such as FHA or VA loans).

Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is typically required if a borrower puts down less than 20% of the purchase price of the home. PMI is provided by private companies and is designed to protect the lender in case the borrower defaults on their loan. The cost of PMI varies depending on the amount of the loan and the borrower’s credit score.

Government Mortgage Insurance

Government mortgage insurance is provided by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). These programs are designed to help borrowers who may not be able to qualify for a conventional loan. Government mortgage insurance can also be required if the borrower puts down less than 20% of the purchase price of the home. The cost of government mortgage insurance is typically lower than PMI.

IS MORTGAGE INSURANCE TAX DEDUCTIBLE?

The short answer is: it depends. Mortgage insurance premiums paid in 2020 and 2021 are tax deductible if you meet certain criteria. However, the tax deductibility of mortgage insurance premiums has changed over the years, so it’s important to know the current rules.

When Was Mortgage Insurance Tax Deductible?

Prior to 2018, mortgage insurance premiums were tax deductible. However, the Tax Cuts and Jobs Act of 2017 eliminated this deduction for tax years 2018 through 2025.

COVID-19 Relief

In December 2020, the Consolidated Appropriations Act was signed into law, which extended the tax deductibility of mortgage insurance premiums through 2021. This means that if you paid mortgage insurance premiums in 2020 or 2021, you may be able to take a tax deduction for those premiums.

WHO CAN CLAIM THE TAX DEDUCTION?

Not everyone can claim the tax deduction for mortgage insurance premiums. To claim the deduction, you must meet certain criteria:

If you are married filing separately, the income limit is $50,000 for both the 2020 and 2021 tax years. If your income exceeds these limits, you cannot claim the tax deduction for mortgage insurance premiums.

FAQS

Can I Deduct Mortgage Insurance If I Refinanced?

If you refinanced your mortgage, you may be able to deduct the mortgage insurance premiums on your new loan. However, you cannot deduct the premiums on your old loan.

Can I Claim Mortgage Insurance On My Investment Property?

No. The tax deduction for mortgage insurance premiums only applies to your primary residence and second home.

How Do I Claim The Deduction?

To claim the deduction for mortgage insurance premiums, you must itemize your deductions on Schedule A of your tax return. You will need to know the amount of mortgage insurance premiums you paid during the tax year. You can find this information on Form 1098, which your lender will send you at the end of the year.

Is Mortgage Insurance Worth The Cost?

Whether or not mortgage insurance is worth the cost depends on your individual situation. If you cannot put down 20% on your home purchase, mortgage insurance may be required. However, if you can afford to put down 20% or more, mortgage insurance may not be necessary. Speak with a financial advisor to determine whether mortgage insurance is right for you.

Can I Get Rid Of Mortgage Insurance?

If you are paying for PMI, you may be able to request that it be removed once you have paid down the principal balance of your loan to 80% of the original purchase price of your home. If you have an FHA loan, you may be able to refinance into a conventional loan once you have 20% equity in your home to eliminate the need for mortgage insurance.

CONCLUSION

In summary, mortgage insurance can have an impact on your taxes, but whether or not it is tax deductible depends on a few factors. If you paid for mortgage insurance in 2020 or 2021 and meet the income and other criteria, you may be able to take a tax deduction. However, if your income exceeds the limits or you do not itemize your deductions, you will not be able to claim the deduction. As with any financial decision, it’s important to weigh the costs and benefits of mortgage insurance to determine if it is right for you.