PMI can add hundreds of dollars to your mortgage payment. You probably want to know if you can deduct this expense on your taxes, just as you can deduct your mortgage interest. With the new tax laws covering the taxes for 2018, your deductions may change and this includes deducting your PMI.
While up until the tax year of 2017, you could deduct your PMI payments along with your interest paid, you can no longer do so, thus far. While Congress could still make a change to the tax code, it is unlikely at this point. If the law does change and you have already filed your taxes, you can file an amendment to make sure you get the credit for the PMI that you paid.
What Can you Deduct?
Something that hasn’t changed is the ability to deduct your mortgage interest and real estate taxes paid. If you pay more than $600 in mortgage interest in the last year, you may deduct them on your taxes. You may also deduct property taxes on any primary residences that you own.
Here’s the catch, though. While you may be eligible to deduct these items from your tax return, you may not be able to do so. The standard deduction increased dramatically for the 2018 tax year. The Tax Cuts and Jobs Act have doubled the standard deduction that you can take today. Taxpayers that file individually can deduct $12,000 and couples filing jointly can deduct $24,000. This means that a large majority of Americans will use the standard deduction today.
While this is good news that you can take the standard deduction, it eliminates the ability to write off your interest and taxes paid. The only way you would be able to deduct these amounts on your taxes is if you have enough deductions that exceed the standard deduction of $12,000 or $24,000 respectively.
What Does a Deduction Do?
You probably wonder how your taxes will be affected by this change. It helps to know what a tax deduction is, first. A tax deduction is the amount of money that you can automatically deduct from your income. In other words, it lowers your taxable income. This in effect, lowers the amount of money that you might owe for taxes.
A tax credit, on the other hand, decreases your tax liability dollar for dollar. This is not the same as a tax deduction. The deduction simply lowers your income. Your adjusted gross income is what lenders then use to qualify you for a mortgage, should you need to purchase a home or refinance an existing mortgage.
Other Ways to Save on PMI
Despite the fact that you probably can’t deduct your PMI payments on your taxes this year, there are other ways to get around it.
First, see if you are eligible to have it eliminated. Many homeowners don’t realize that they have the option to ask for the insurance to be eliminated. This is the case if you owe less than 80% of the home’s current value. If your home appreciated and you’ve paid your mortgage down, you may be in this boat and not even realize it. You should talk to your lender about their policy. Some lenders require you to pay for a new appraisal to prove the home’s higher value while others will run an automatic valuation for you, after you request it. You should know, though, that this only applies to conventional loans. If you have an FHA or USDA loan, you’ll have to take the steps below.
If you aren’t eligible to have your PMI eliminated, you can refinance your loan to get out of it. This pertains to any type of loan whether conventional or government-backed. If you are eligible for a new conventional loan with a loan-to-value ratio of less than 80%, you can bypass the need to pay mortgage insurance on your loan. Of course, in order to qualify, you will need decent credit, a low debt ratio, and proof that you can afford the new loan.
Although PMI isn’t deductible on your taxes during the year 2019, there are other ways that you can get around it. If the deduction does become reality, thousands of homeowners will need to amend their tax returns in order to get the deduction that they are entitled to on their taxes.