NEWS
California homeowners will see significant tax changes in 2026 as federal rules reinstate the Private Mortgage Insurance deduction and interact with California’s broader mortgage interest limits. These updates may affect whether taxpayers itemize and the amount they can deduct on both their federal tax return and their California return when filing in 2027.
Federal tax rules will bring back the treatment of PMI premiums as deductible mortgage interest, effective starting in 2026. This matters for homeowners who put down less than 20 percent and continue to pay PMI on a primary residence. With PMI once again counting toward itemized deductions, many households may see a reduction in taxable income when filing their federal tax return.
Income limits, however, continue to restrict PMI eligibility. The deduction begins to phase out once adjusted gross income exceeds $100,000 and ends entirely at $110,000. These thresholds may influence tax planning for California residents whose income frequently falls near these levels.
California’s deduction limits differ from federal law in ways that benefit many taxpayers. While federal rules cap deductible mortgage debt at $750,000, California allows interest deductions on up to $1,000,000 of mortgage debt. In high-cost regions across the state, homeowners commonly carry larger mortgage balances, making California’s broader limit particularly important.
The widened gap between federal and state standard deduction amounts will continue to shape filing choices in 2026. Federal standard deductions rise to $32,200 for married couples filing jointly and $16,100 for single filers. California’s standard deduction remains much lower at $11,080 for married couples and $5,540 for single filers. As a result, some taxpayers may take the federal standard deduction but still itemize on their California return to capture additional tax benefits.
Another major shift takes effect with the higher cap on state and local taxes. The federal SALT cap increases from $10,000 to $40,400 in 2026, allowing more room for property taxes and income taxes to be included in itemized deductions. Because California residents often pay higher income taxes and property taxes, this update increases the likelihood that itemizing will exceed the federal standard deduction for many households.
The PMI deduction has a long record of expirations and temporary renewals. First introduced to support homeowners with smaller down payments, the deduction frequently lapsed and was extended for short periods. Its return beginning in 2026 restores consistent tax treatment for PMI after several years of uncertainty.
California has historically maintained its own mortgage interest policies that diverge from federal law. The state’s higher debt limit reflects long-standing housing costs that exceed national standards, especially in major metro areas. This approach helps more homeowners deduct interest tied to mortgage balances that would no longer qualify under federal law.
The expansion of the SALT cap represents a substantial shift in federal tax policy. The previous $10,000 cap, introduced under earlier tax reforms, restricted the deductions available to homeowners in high-tax states, including California. Raising the cap to $40,400 restores access to a broader portion of state and local taxes, affecting both itemizing decisions and overall filing outcomes.
“Restoring PMI as deductible mortgage interest provides many middle-income homeowners with a clearer path to reducing taxable income, especially in high-cost states,” an Internal Revenue Service spokesperson said in a recent briefing.
Representatives from the California Franchise Tax Board have emphasized the importance of the state’s higher mortgage debt limit. “California’s interest deduction threshold was designed to reflect typical home prices here, allowing more taxpayers to deduct interest that would exceed federal limits,” an FTB official explained.
Tax analysts also point to the new SALT cap as a major factor for homeowners evaluating their 2026 filing options. “Increasing the cap means millions of married couples in states like California may once again find itemizing more advantageous than taking the standard deduction,” said a policy researcher at a national tax institute.
Tax professionals across the state say homeowners should evaluate projected mortgage interest payments, PMI costs, and expected property taxes well before 2026 ends. “Itemizing isn’t automatic, even with the new rules,” a tax advisor in San Francisco noted. “Homeowners should review their documents annually, rather than rely on past habits, to understand how the interaction between income, deductions, and mortgage debt affects their return.”
Homeowners should begin reviewing their expected interest payments, PMI premiums, and state and local taxes to determine whether itemizing may result in a lower taxable income. Because the mortgage interest deduction rules differ from federal limits, evaluating both returns separately can reveal additional opportunities for savings.
Reviewing Form 1098 statements from mortgage lenders and confirming accurate records of property tax payments will help ensure that deductible expenses are appropriately documented. Taxpayers should also monitor their adjusted gross income, especially if they are near the phaseout threshold for the PMI.
Consulting a tax professional or using reliable tax software may help residents understand how the updated rules apply to their situation. Early preparation can help taxpayers take advantage of the PMI deduction, the expanded SALT cap, and California’s broader mortgage interest limits when filing their 2027 tax returns.
By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now
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