When you buy a home with less than the customary 20 percent down payment, you'll be required to buy private mortgage insurance, called PMI. Although you pay the premiums, PMI doesn't protect you; it protects only your mortgage lender in case you default. There is some good news, however. The tax deduction for PMI, which began in 2007 but was scheduled to disappear for 2013, has been extended.
PMI is required for all non-government, standard mortgage loans if the loan-to-value exceeds 80 percent. However, loans backed by the Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture Rural Housing Service come with their own mortgage insurance requirements. In 2013, the up-front PMI and government home loan insurance tax deduction will apply when you file your tax return.
You can deduct PMI up-front costs in the "interest paid" area of Schedule A on your tax return. You'll find the eligible deductible amount in box 4 on your annual loan information statement from your lender. This is Form 1098, which shows your interest paid to your mortgage lender in a given year. Schedule A is the tax form on which you list itemized deductions.
You must have bought or refinanced your home on or after Jan. 1, 2007 to receive the PMI tax deduction. If you refinanced your home during this period, you're limited to deducting PMI on only the original mortgage amount. For example, if you bought your home with a $100,000 mortgage loan but refinanced it for $125,000 and got $25,000 cash, you can deduct only the PMI cost for the original $100,000 mortgage. The home should be your primary residence or a vacation home that you don't rent out.
Although there's technically no limit on the amount of PMI premium that you can deduct, your deductible amount might be reduced because of your income. If your adjusted gross income for tax purposes is more than $100,000 if you're a single taxpayer, a joint filer or head of household, the PMI amount you can deduct reduces by 10 percent for every $1,000 you report over the maximum allowed income. Single filers, married joint filers and heads of households with adjusted gross incomes of $109,000 or more get no PMI tax deduction. Married taxpayers filing separately are subject to the same rule, but with a lower income maximum of $50,000 for each taxpayer.
Schedule A instructions come with a worksheet you can use to calculate your PMI deduction amount if you're subject to a reduction because of your adjusted gross income. If you prefer tax-preparation software, this worksheet will come embedded in the program to help you determine your PMI up-front deduction.
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