Owning a home can have tax advantages. Monthly mortgage payments may include several smaller charges. In addition to the principal and interest that you owe, you may have to pay a portion of your annual hazard insurance premium, property tax bill and private mortgage insurance. Some of these items are deductible on your income tax return, which can lessen your tax burden and save you money. However, deducting your private mortgage insurance payments may be complicated if you don't understand the rules.
Overview
Placing less than a 20 percent down payment on a home poses a higher risk of default for mortgage lenders. To allow buyers with less cash to purchase a house, private mortgage insurance is a requirement of loans that are more than an 80 percent value of the property. Instead of protecting the homeowner, as hazard insurance does, PMI protects the lender in case you default on your loan. Once your home value reaches a 20 percent equity, you can request to cancel your PMI payments.
Tax Deduction
Before 2007, no income tax deduction for your PMI payments was available. However, if you took out a new mortgage or refinanced in 2007 or later, you are able to deduct all of your payments made on a primary residence or second home that is used by you for vacations or other personal reasons. The deduction does not apply to investment rental property. As of 2011, you can take advantage of the tax break only until the end of the year, if it is not extended.
Requirements
You also can claim the tax deduction if you refinanced in 2007 or later. However, you can use the PMI payments made for the amount of your original loan only and not a higher mortgage. If your adjusted gross income on your tax return is less than $100,000, you can deduct 100 percent of PMI premium payments. However, for each $1,000 over the limit, the amount you can deduct is reduced by 10 percent and eliminated completely if your AGI is $109,000.
How to Report
To claim your PMI payments, you must itemize your tax deductions on Internal Revenue Service Schedule A. You usually can add your premium payments to the mortgage interest that you claim. The amount of PMI to deduct may be found in Box 4 on Form 1098, which is sent to you by your lender each year. If the box for reporting PMI is empty, contact your lender for the exact amount. Because some federal regulations about PMI deductions can differ between agencies, contact you tax consultant about your specific situation.
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