Danette O'Neal, PhD

If you’ve been paying for private mortgage insurance (PMI) every month because you put down less than 20% on your home, you may be able to get some of that money back by claiming the PMI deduction on your federal income tax return.

Did you know that not deducting PMI is one of the top mistakes homeowners make on their taxes? Don’t be one of the people who misses out.

Do You Qualify for the Deduction?

OK, just because you have PMI premiums doesn’t mean you can deduct them. Here’s what qualifies you:

• You got your loan in 2007 or later.
• Your mortgage is for your primary residence or a second home that’s not a rental property.
• Your adjusted gross income is no more than $109,000. The deduction phases out once your AGI exceeds $100,000 ($50,000 for married filing separately) and disappears entirely at more than $109,000 ($54,500 for married filing separately).

How to File for the PMI Deduction

You’ll have to itemize and use Schedule A.

If you make no more than $100,000 a year, put the amount of insurance premiums you paid last year on Line 13. Don’t include pre-paid premiums for this year. You’re doing taxes based on last year’s income and expenses, so this year’s premiums don’t count even if you pre-paid them last year. (More about deducting prepaid and upfront mortgage insurance here.)

If your adjusted gross income is between $100,000 and $109,000, use the worksheet included with Schedule A to figure out how much you get to deduct.

How Much Can You Save? It depends on how much you’re paying. A good rule of thumb industry experts use: You’ll pay $50 a month in premiums for every $100,000 of financing. Keep in mind, though, that the amount of the downpayment, type of loan, and lender requirements can all affect your actual cost.

For example, if you put 5% down on a $200,000 house, you’ll pay monthly PMI premiums of about $125. Increase your downpayment to 10%, and you’ll pay less than $80 a month.

So how does this affect your tax bill? Let’s say your adjusted gross income is $100,000. You bought a $200,000 house, put down 5%, and paid $1,500 in PMI premiums ($125 times 12 months). The deduction for PMI cuts your taxable income by $1,500. If you’re in the 15% tax bracket, you save $225 on your tax bill ($1,500 x 15%), and if you’re in the 25% tax bracket, you save $375 ($1,500 x 25%).

The Best Savings of All: Canceling PMI

Although the tax deduction is nice — at least while it lasts — getting rid of PMI altogether is even nicer.

You can cancel your PMI when you have 20% equity in your home. Lenders are required to automatically cancel it once you have 22% equity. If you think you’re at that threshold, find out more about canceling your PMI. (Houselogic)