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Homeowners who are eligible to deduct the PMI premiums paid on a mortgage can shave hundreds of dollars off their income tax bills.

If you put down less than 20% on a house, expect to be required to purchase private mortgage insurance, which protects the lender in the event you default on the home loan. That’s a good deal for the lender, considering you’re the one paying the PMI premiums.

But PMI is also a good deal for aspiring homeowners. Many people, especially first-time buyers, can’t come up with big downpayments. PMI encourages lenders to give them mortgages anyway.

Don’t pay PMI a day longer than you must, however. Canceling the insurance as soon as you’re entitled can save you thousands of dollars. For eligible homeowners, deducting the premiums come tax time can save hundreds more.

Getting the PMI tax deduction

Starting with loans issued or refinanced in 2007, and continuing through 2010, you can deduct each year’s premiums paid on PMI for your principal residence and for a non-rental second home. The tax break was originally good for 2007 only, but the government extended it for three years. Unless it’s extended again, you won’t be able to take the deduction beyond 2010.
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This article was written by Amy Libonate at Delaware Financial Caoitol Corp.  amy@delawarefinancial.com 

For many American homeowners, interest paid on a mortgage is tax deductible in the year in which it was paid.

Knowing that, eligible homeowners can increase their 2009 tax deductions just by making their January 2010 mortgage payment before the end of the year.

By paying in 2009, the mortgage interest paid can be applied against 2009’s itemized tax deductions even though the payment isn’t technically due until 2010.

It can reduce your tax burden come Thursday, April 15, 2010.

And lest you think you’re paying the mortgage “in advance”, remember that mortgage interest is paid in arrears; a payment due January 1 accounts for interest that accumulated in December 2009 anyway.

Tax planning is a complicated issue and not all homeowners qualify for mortgage interest tax deductions. Check with your tax professional before making tax planning decisions.