Paying More on Your Mortgage and its Tax Advantage
- Author: William Asher
- Posted: 2024-04-01
So how do you qualify? First, your deductions on your tax return should be itemized. To benefit from the deduction of interest, you only need to pay extra and apply it to the mortgage interest. In effect, this will ease your tax liability.
Payments in Advance
Simply put, an early January payment could minimize your upcoming IRS bill. Here’s why.
If rental dues are payments you do beforehand, let’s say, your Jan. 1 bill pays for your stay for the next month, mortgage payments, on the other hand, are payments you make after the end of an occupancy period. So your Jan. 1 bill is actually your payment for the whole month of December, making it eligible for the coming year’s tax accounting. Advancing that payment even by just a day would be considered “pre-paid” interest, so you get an additional tax deduction for the interest paid.
Making an Additional Mortgage Payment
The key here is timing. Make sure your mortgage payments are always on time for the entire year. For your January payment, make sure that it gets paid before the last day of December, but only after you’ve settled payments for the month of December.
Be extremely detailed and review your mortgage company’s terms to make sure that your early payment gets credited for the month of January the following year. When filed on time, it will reflect on your Form 1098 given to you by the mortgage firm. It will show the amount you can claim as a deduction for home interest.
Take note, however, that doing this method now will result in having fewer deductions for the next year. If you want to have more savings this year then by all means to do it. Your income will always have a slight difference yearly, so it’s wise to try and pull in savings this year than put it off for the next year. Still, it all depends on your needs so weigh your options well.
What You Need to Do
As with most legal processes, there are rules that apply to qualify for mortgage interest deduction. First, the mortgage must bear your name; second, you have an itemization on Form 1040 when you file taxes. If both criteria are met, you can reduce interest paid on up to $1.1 million of mortgage debt, which can be broken down into two factions.
Interest paid can be deducted on up to $1 million of mortgage debt used to purchase, build, or make home improvements. Other than that, you can have $100,000 deducted if it was used for other reasons if it was not intended for house enhancements. So if you borrow a huge sum, let’s say, to send your children to college, you get the mortgage interest only on the first $100,000 since it wasn’t used to improve or build a house.
Other Considerations
While a very smart move, paying your mortgage early works best for people who have varying income year to year, or those who are about to get slapped with a huge tax bill and would want to adjust for it for the years to come.
If your yearly income varies because you run your own business, earn commissions, or acquire bonuses in hard-to-estimate amounts each year, an early mortgage payment in a year where your income will be sky high is greatly advised. If it gets even higher the next year, do the process again – pay early – so you get to save a whole year’s worth of interest deduction.
An early mortgage payment is one smart tax tip you can do at the end of the year. Just make sure you have the full understanding of the whole process because it will affect your taxes in the future. If you’ve decided to pay early for this year, it’s imperative you pay early for every other year so you’ll be ready to receive the lesser 11-month size deduction.