This article should not be considered tax advice. For tax-related questions or mortgage strategy related to your individual tax liability, speak with a licensed accountant.
Looking for a way to reduce your federal tax liability? Consider making your January 2014 mortgage payment a few days early.
Homeowners who send their January 2014 mortgage payment before New Year's Day may benefit from a bigger mortgage interest tax deduction on their 2013 federal tax returns.
It's November and, within a few weeks, you'll receive your mortgage statement for January 2014. Study it, and you'll notice that the payment is split into as many as 4 separate parts :
Together, these four parts are called "PITI" but it's the "interest" piece that's of most interest to homeowners. This is because U.S. federal tax code allows homeowners to claim mortgage interest as a tax-deduction in the year in which it was paid.
Today's homeowners can boost their 2013 mortgage interest tax deduction, therefore, by making their upcoming January 2014 mortgage payment before the calendar flips to January.
By making your payment in 2013, your lender will book interest paid to the tax year of 2013, and the extra interest paid will be added to your IRS Form 1098.
For homeowners paying mortgage insurance, the benefits are even bigger.
Mortgage insurance is a required part of all FHA and USDA mortgages; and is required for some conventional loans via Fannie Mae and Freddie Mac. Mortgage insurance insures the loan against default, and helps to keep low-downpayment loans available to U.S. homebuyers.
As part of the American Taxpayer Relief Act of 2012, mortgage insurance payments are tax-deductible for 2012 and 2013. Mortgage insurance is not tax-deductible in 2014, however.
If your current mortgage requires mortgage insurance, then, you can maximize your tax savings by paying the January 2014 mortgage early.
Making your January mortgage payment a few days early does not come without caveats.
First, not every mortgage is eligible for mortgage interest tax deductions. The IRS outlines mortgage interest tax deduction eligibility on its website. You'll want to make sure your loan qualifies for mortgage interest tax deduction.
Second, because of the Alternative Minimum Tax (AMT), some tax filers find their normal, allowable tax deductions pared by the IRS -- including those deductions related to mortgage interest paid. The AMT may reduce the benefits of making January's mortgage payment in December.
Furthermore, remember that the bonus deduction applies to January's payment only.
The IRS allows you to make (and claim) January's mortgage payment in December because the payment is imminently due. Attempts to make your February payment will be in vain. Your lender will not accept your payment, and the IRS will not apply your deduction.
Lastly, remember to consult a tax professional before making a personal tax decision. Everyone's tax situation is unique and the advice offered may not apply to all taxpayers equally.
If you plan to pay your January 2014 mortgage statement in 2013 in order to increase your 2013 tax deductions, it's wise to "do it early".
As the end of the year approaches, mortgage lenders are notoriously short-staffed as operations teams use vacation days and otherwise take days off of work.
Lenders typically require extra time to receive and process payments during the holidays.
If you pay your mortgage electronically, or via auto-pay, have your check clear no later than Monday, December 23, 2013.
If you send your checks via mail, have your payment stamped and sent no later than Wednesday, December 18, 2013.
A larger tax deduction can save you money, and so can an outright refinance. Today's mortgage rates remain near historical lows and the government is currently sponsoring a bevy of "no appraisal" refinance programs.
These programs include HARP, the FHA Streamline Refinance program, the VA Streamline Refinance program, and the USDA Streamline Refinance, among others.
See what today's low rates can do for your home. Get started with a rate quote today. They're available online, with no cost, and with no obligation whatsoever.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2014 Conforming & FHA Loan Limits
Mortgage loan limits for every U.S. county,
as published by Fannie Mae & Freddie Mac, and the FHA.