It’s that time of the year again…namely the end of the year, when year-end tax tips flood the web and our inboxes.
With regard to the old mortgage, taxpayers might be able to get a larger write-off if they make their January mortgage payment this month, as opposed to in January when it’s actually due.
In case you didn’t know, mortgages are paid in arrears, meaning you pay interest for the prior month after it accrues. Conversely, rent is paid in advance of the month in which you occupy a place.
This means December’s mortgage interest can be tax deductible for the current year if it’s paid in December as opposed to in January.
13 Mortgage Payments in One Year
The purpose of making an early mortgage payment at year-end is to create a larger tax deduction via the mortgage interest paid throughout the year.
A homeowner might be inclined to employ this method if they think they’ll owe more in taxes this year than next.
So if you had a “good year” and expect next year to be a little lighter in terms of income (and associated taxes), it could make sense to prepay your January mortgage payment sometime in December to offset this year’s higher income.
Assuming this method wasn’t employed the year before, a homeowner can actually make 13 mortgage payments in a single year.
Obviously this is only a benefit if you itemize your taxes and get a write-off for home mortgage interest via IRS form 1098.
Additionally, it should be noted that paying early, or before your due date, won’t save you any money in actual interest on a traditional mortgage. It just means interest paid will count toward this year’s tax bill as opposed to next.
Keep in mind that making a payment a month earlier this year will prevent you from accomplishing the same thing next year.
For example, if your January payment is made in December, you’ll only be able to make 12 regular monthly payments the following year.
You can actually make just 11 payments in the following year and then you’ll be able to make 13 the next. Just be sure you don’t pay late and that your payment strategy is actually worthwhile.
Tip: You can still make extra payments to principal whenever you’d like, assuming you want to pay off your mortgage early.
Give Yourself a Buffer to Get the Payment In
If you do plan to execute this strategy, it might also be wise to send in your January mortgage payment with a few days to spare.
Some people may argue that a check dated December 31st will work toward this year’s taxes, but I like to err on the side of caution and make sure my payment is actually collected and applied during the calendar year in which I want to take the deduction.
In other words, I’ll send payment at some point relatively soon after the 15th of December to ensure it’s counted toward this year’s taxes, assuming I want a larger deduction this year. That way the interest paid will most certainly show up on my 1098.
Be sure your loan servicer applies the payment correctly and doesn’t simply apply it to your principal balance thinking it’s an extra payment.
And if you do choose to make your mortgage payment early for tax purposes, be sure to consult with your CPA or tax advisor to ensure it makes sense for your unique situation.
There are all types of complicated tax policies that may affect what you can actually deduct.
(photo: DafneCholet)