We all know being a homeowner definitely has its advantages. If you have a mortgage loan, you are hopefully aware of the tax deduction you get each year for the interest you paid to your lender. However, did you know that by strategizing your monthly payment schedule, you can further benefit from the tax savings available from the mortgage interest deduction.
Let me explain…
Technically, your mortgage payments are made for the month prior. In other words, your January 1st mortgage payment actually covers interest accrued during the month of December. By making your January 1st mortgage payment early, you can deduct its interest. 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.
Of course, if you do this strategy now, you will have less of a deduction for 2017. However, conventional wisdom, considering the time value of money, says to take savings now rather than later, if all other factors are equal. But consider the possibility both ways. If you had or expect a large change in your income from one year to the next, that would be a reason to choose to pull the savings into this year, or to defer it to next year.
Words of Wisdom
Having worked at a bank for over a decade, allow me to advise you to make sure that you 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. Even then, you should double check afterwards to ensure the payment got applied correctly. Sometimes banks assume that an extra mortgage payment, made ahead of schedule, is intended as a principal reduction. While there are advantages to making extra principal payments as well, it does not benefit you on your tax bill.
Here’s A Bonus Tip
If your mortgage holder pays your annual property tax bill from an escrow account, that also will be listed as a deductible home-related expense on your Form 1098.
BUT if you, not your lender, pay your property tax bill, and it's due early next year, consider paying it in December as well. As with your mortgage interest, this payment will be shifted into this tax year.
The Fine Print
- You must itemize your tax return to deduct any mortgage interest. In addition, keep in mind that not all mortgages have tax deductible interest. Typically, mortgage interest on an owner occupied home is deductible, while the interest on a rental property can be counted as an expense against rental income. Interest on a second home or vacation property is typically ineligible.
- Also, don’t get too greedy on me. You can’t make your February mortgage payment early to boost your year-end tax deduction. Uncle Sam knew where your mind was headed and so he created a tax law that prohibits write-offs for pre-paid interest, making it ineligible for this year’s tax deduction.
- There may be a cap to the maximum amount that can be deducted. It’s always best to consult with your tax professional to see if you face any restrictions in mortgage interest deductibility.
About the Author:
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.