Mortgage Insurance Premium Deduction 2026: PMI Returns Under OBBBA, the $100,000 AGI Phaseout, the 84-Month Rule and Form 1098 Box 5 for US CPA Firms
The mortgage insurance premium deduction is back for 2026. Qualified premiums, including PMI on conventional loans, FHA mortgage insurance, VA funding fees and USDA Rural Housing Service guarantee fees, can again be treated as home mortgage interest on Schedule A. The draft 2026 IRS Publication 936 (dated Sept. 30, 2026) says the itemized deduction “has been reinstated for tax year 2026.” The catch is a low AGI phaseout. The deduction starts shrinking above $100,000 of AGI and is gone above $109,000. For US CPA firms, Form 1098 Box 5 matters again for a narrow band of itemizing homeowners.
What OBBBA changed, and what it didn’t
IRC §163(h)(3)(E)(i) treats premiums paid or accrued for qualified mortgage insurance, in connection with acquisition indebtedness on a qualified residence, as qualified residence interest. The termination clause in §163(h)(3)(E)(iv) switched it off for amounts paid or accrued after December 31, 2021. That is why IRS Publication 530 (2025) said the deduction “has expired,” and why 2022–2025 premiums stay nondeductible.
P.L. 119-21 (OBBBA, signed July 4, 2025) §70108 rewrote §163(h)(3)(F), the special rules for taxable years beginning after 2017. It removed the “before January 1, 2026” end date and added new subclause (III): “Clause (iv) of subparagraph (E) shall not apply.” Section 70108(b) makes the change effective for taxable years beginning after December 31, 2025. It also made the $750,000 ($375,000 MFS) acquisition-debt limit permanent. Steve Rossman, CPA, writing for the PICPA blog (Mar. 18, 2026), summed up the practical effect: PMI can be deducted “just like mortgage interest—if you itemize.”
OBBBA did not change the phaseout, and §163(h)(3)(E)(iii) still excludes contracts issued before January 1, 2007.
What counts as qualified mortgage insurance
Under §163(h)(5)(E), qualified mortgage insurance means insurance provided by the Department of Veterans Affairs, the Federal Housing Administration or the Rural Housing Service, plus private mortgage insurance as defined in section 2 of the Homeowners Protection Act of 1998 (as in effect December 20, 2006). Draft Pub. 936 calls the VA version a funding fee and the RHS version a guarantee fee.
Two exclusions catch clients:
- Mortgage protection insurance is different. TaxAudit’s Neal D. Volker (Jan. 20, 2026) puts it simply: mortgage insurance protects the lender, while mortgage protection insurance protects the borrower. Borrower-side coverage is usually life insurance, and Treas. Reg. §1.262-1(b)(1) says life insurance premiums paid by the insured are not deductible.
- Debt that isn’t acquisition debt. Premiums must be connected with acquisition indebtedness, so proceeds not used to buy, build or substantially improve the home don’t qualify.
Mortgage insurance on rental or business property was never part of the Schedule A rule. IRS Publication 527 lists insurance among rental expenses, and the Schedule E instructions allow ordinary and necessary rental expenses, including insurance. Volker notes that mortgage insurance on rental, investment or business property “had no expiration date.” Keep those on Schedule E or C, not line 8d.
The AGI phaseout, with the math
Section 163(h)(3)(E)(ii) reduces the premium amount by 10% for each $1,000 ($500 if married filing separately), or fraction thereof, by which AGI exceeds $100,000 ($50,000 MFS). Draft Pub. 936 states the result: above $100,000 ($50,000 MFS) the deduction is limited, and above $109,000 ($54,500 MFS) “you can’t deduct your mortgage insurance premiums.” The test uses AGI from Form 1040 line 11b.
The “fraction thereof” wording matters. A client with $1,800 of premiums and AGI of $104,500 is $4,500 over the threshold. That counts as five steps, so the reduction is 50% and the deductible amount is $900. (Some summaries say $110,000; the IRS says $109,000.) Draft Pub. 936 points to a worksheet in the Schedule A line 8d instructions; the 2025 instructions still show line 8d as “Reserved for future use,” so watch for the 2026 version.
Prepaid premiums: the 84-month rule
Under §163(h)(5)(F) and Treas. Reg. §1.163-11, qualified mortgage insurance paid for periods after the year of payment is allocated over the shorter of the stated term of the mortgage or 84 months, starting with the month the insurance was obtained. If the mortgage is paid off early, no deduction is allowed for the unamortized balance. The allocation rule covers FHA and private mortgage insurance. It doesn’t apply to VA funding fees or RHS guarantee fees, which draft Pub. 936 says can be deducted fully in 2026 if the contract was issued in 2026.
Draft Pub. 936’s example: Ryan buys a home in May 2026 with a 15-year mortgage and prepays $9,240 of PMI at closing. Because 84 months is shorter than 180 months, with AGI of $76,000 he deducts $880 for 2026 ($9,240 ÷ 84 × 8 months). For 2027 he can deduct $1,320 ($9,240 ÷ 84 × 12) if his AGI is $100,000 or less.
Form 1098 Box 5 and Schedule A line 8d
Under the Instructions for Form 1098 (Rev. 12/2026), lenders report mortgage insurance premiums in Box 5 only when §163(h)(3)(E) applies for the year. The threshold is $600 or more, including prepaid premiums, tested mortgage by mortgage. Expect gaps: a client with two loans under $600 each may get no Box 5, and draft Pub. 936 says to ask the issuer if a funding or guarantee fee isn’t in Box 5. The draft 2026 Schedule A (created May 12, 2026) has line 8d, “Mortgage insurance premiums,” feeding line 8e with home mortgage interest and points.
It is still an itemized deduction, so a client who takes the standard deduction gets nothing from it. PICPA’s Rossman suggests refreshing multiyear itemized-versus-standard projections, and clients who expect to itemize may want to revisit withholding (see our draft 2027 Form W-4 guide).
CPA checklist for 2026 returns
- Collect 2026 Forms 1098 and closing statements for clients with PMI, FHA, VA or USDA loans.
- Confirm the insurance contract was issued after 2006 and the debt is acquisition debt on a first or second home.
- Separate lender-required mortgage insurance from mortgage protection or life coverage.
- Amortize FHA and private upfront premiums over the shorter of the loan term or 84 months; stop at payoff.
- Compute AGI first, then apply the 10%-per-$1,000 phaseout ($500 MFS), rounding any fraction up to a full step.
- Move rental and business mortgage insurance to Schedule E or C.
- Don’t amend 2022–2025 returns for PMI; the termination clause applied to those years.
Review it alongside other OBBBA changes, such as the section 199A QBI deduction and the removal of the APTC repayment cap for 2026.
Where this fits for Tax Brew readers
Box 5 checks, amortization schedules and phaseout math take time. If your firm needs extra capacity, Tax Brew offers outsourced tax preparation support and bookkeeping for US CPA firms. Email info@taxbrewglobal.com.
Frequently asked questions
Is PMI tax deductible in 2026?
Yes, for itemizers. P.L. 119-21 (OBBBA) §70108 added §163(h)(3)(F)(i)(III), which turns off the termination clause in §163(h)(3)(E)(iv) for taxable years beginning after December 31, 2025. The draft 2026 IRS Publication 936 says the itemized deduction for qualified mortgage insurance premiums has been reinstated for tax year 2026 and is claimed on Schedule A line 8d. Qualified mortgage insurance includes private mortgage insurance and insurance provided by the FHA, the VA (funding fee) and the Rural Housing Service (guarantee fee), on acquisition debt for a first or second home, under contracts issued after 2006. Premiums paid in 2022 through 2025 remain nondeductible.
What is the income limit for the mortgage insurance premium deduction?
Under §163(h)(3)(E)(ii), the deductible amount is reduced by 10% for each $1,000 ($500 if married filing separately), or fraction thereof, by which AGI exceeds $100,000 ($50,000 MFS). Draft Pub. 936 says that if AGI on Form 1040 line 11b is more than $109,000 ($54,500 MFS), you can’t deduct mortgage insurance premiums. For example, AGI of $104,500 is $4,500 over the threshold, which counts as five steps, so the deduction is reduced by 50%.
How are prepaid mortgage insurance premiums deducted?
Under §163(h)(5)(F) and Treas. Reg. §1.163-11, prepaid FHA or private mortgage insurance allocable to later periods is spread over the shorter of the stated mortgage term or 84 months, starting with the month the insurance was obtained, and no deduction is allowed for the unamortized balance if the mortgage is paid off early. In the draft Pub. 936 example, $9,240 of PMI prepaid in May 2026 on a 15-year loan gives an $880 deduction for 2026 ($9,240 ÷ 84 × 8). The rule does not apply to VA funding fees or RHS guarantee fees.
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