Being a homeowner can be difficult. But, when it comes to taxes, homeownership has it’s advantages. If you have a mortgage loan, you’re most likely aware of the tax deduction you can get each year for the interest you paid to your lender. However, did you know that strategizing your monthly payment schedule can help you to save even more money on taxes?
How to Save Money on Taxes By Timing Mortgage Payments
Technically, your mortgage payments are made for the month prior. In other words, your January 1st mortgage payment actually covers any interest accrued during December. By making your January 1st payment earlier than December 31st, you can deduct its interest come tax filing season.
If your loan payment includes monthly mortgage insurance (also known as PMI), then your savings will be even greater because mortgage insurance is also tax deductible!
It’s important to keep in mind that if you utilize this strategy now then you’ll have less of a deduction next year. However, conventional wisdom says to take savings now rather than later. Unless you know that your income will change wildly from year-to-year, it’s likely a good idea to use this strategy for this tax season.
Don’t Forget to Communicate with Your Lender
Strategy is all good and fine - but it does you no good if you fail to communicate your intentions clearly with your lender. If you have a coupon book for your mortgage, you should be able to send in a future payment with the appropriate coupon and a note asking for it to be applied to your mortgage immediately.
Still, it’s always a good idea to double check that the payment was processed correctly. Sometimes banks assume that an extra mortgage payment, made ahead of schedule, is intended as a principal reduction. Their thought process isn’t completely off, but making extra principal payments won’t reduce your tax bill next April.
Bonus Tip: Check Your Property Tax Bill
If your mortgage holder pays your annual property tax bill from an escrow account, that payment is also listed as a deductible home-related expense on your Form 1098.
If you pay your property tax bill (not your lender), consider paying it before December 31st. This early payment will work the same as any early mortgage payments - the payment will be shifted into this tax year and help you save more money on your taxes.
Remember: You Must Itemize to Claim These Deductions
Many people forget that you have to itemize your taxes in order to deduct any mortgage interest. It’s also important to remember that not all mortgages have tax deductible interest. Usually, mortgage interest on an owner occupied home is deductible. But if you have a rental property, the mortgage interest can be counted as an expense against rental income earned.
If you have a second home or vacation property that you aren’t renting, you may not be able to deduct mortgage interest. You’ll need to check with a certified tax professional (CPA) to ensure you’re filing the correct deductions.
Impending Tax Reform May Change Things
The Tax Cuts and Jobs Act is currently pending, but it may cause drastic tax changes in the future. To boil it down to it’s core - the mortgage interest deduction would only be permitted on the first $500,000 of mortgage debt (instead of the current $1,000,000). In addition, only mortgage debt on an individual's primary residence would be considered (whereas currently mortgage interest on a second/vacation home may also be deducted).
While this may not seem like it has the ability to dramatically impact your tax savings - it does. I suggest working with a CFP® professional and a tax professional to ensure you’re filing all the correct deductions, and that you’re always maximizing the money you have using strategic planning.
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Desmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.