IRS Tip : Maximize Your 2012 Mortgage Interest Tax Deduction
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Want to increase your 2012 mortgage interest tax deductions? Consider making your January 2013 mortgage payment a few days early.
Work U.S. Tax Code To Your Benefit
It's December and, within a few weeks, you'll receive your mortgage lender's January mortgage statement. Study it, and you'll notice that the payment is broken into as many as 4 parts :
- Principal : A partial repayment on the original monies borrowed
- Interest : Based on your mortgage rate, a payment for the right to borrow said monies
- Escrow : Partial payments of your annual tax and/or hazard insurance bill
- Mortgage Insurance : For some FHA, USDA and conventional loans, a payment to insure the loan against loss
Of these four parts, it's the "Interest" section that matters for tax reasons. This is because, for many homeowners, mortgage interest is tax-deductible for the year in which it was paid.
You can boost your 2012 mortgage interest tax deduction, therefore, by making your January 2013 mortgage payment before the New Year hits. By doing so, your lender books the interest paid to 2012, and will include the sum on your IRS Form 1098.
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Before You Pay Your Mortgage Early, Know The Pitfalls
Making your January mortgage payment a few days early does not come without caveats.
For example, not every mortgage is mortgage interest tax deduction-eligible. The IRS outlines mortgage interest tax deduction eligibility via this flowchart. Follow along at-home to make sure your loan qualifies.
In addition, because of the Alternative Minimum Tax (AMT), some tax filers find that their "normal" tax deductions get pared by the IRS -- including those related to the mortgage. AMT may reduce the benefits of making January's mortgage payment in December.
And, lastly, don't get ambitious.
The IRS allows you to make (and claim) January's mortgage payment in December because that's when the payment comes due. However, if you attempt to pay your February mortgage payment in advance as well, it will be in vain.
Making your February mortgage in December (i.e. before the mortgage interest has accrued) is treated as a mortgage "prepayment".
Prepaid mortgage interest is rarely tax-deductible in cases like this.
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Get A Bigger 2012 Mortgage Interest Tax Deduction
If you plan to pay your January 2013 mortgage statement in 2012 to collect a bigger tax deduction, make sure you "do it early". As the end of the year approaches, mortgage lenders are short-staffed and may need more time to receive and process your paperwork.
If you pay your mortgage electronically, or via auto-pay, try to have your check clear no later than Friday, December 28, 2012.
And, lastly, please do not accept the above as tax advice; this is just one method of maximizing tax credits and it can't be used by everyone. If you plan to prepay your home loan, talk to your accountant first.
The "pay early" plan could be a waste depending on your particular taxpayer profile.
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Bonus Savings : Refinance To Sub-4 Percent Rates
Since 2009, mortgage rates have been on a steady, downward decline. In 2012, they've been above 4 percent for a total of 7 days. There are plenty of refinance opportunities for U.S. homeowners -- especially the underwater ones.
With HARP, the FHA Streamline Refinance program, and the VA Streamline Refinance program allowing unlimited loan-to-value, there are few obstacles between today's homeowners and access to the lowest rates of a lifetime. And, for homeowners with equity, the savings are equally large.
Get started with a rate quote. Even better than lowering your income tax obligation is lowering your monthly mortgage payments to the bank.
