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.
The Tax Benefits Of Your Mortgage
A little bit of planning can go a long way.
For homeowners who claim mortgage interest deductions on their tax returns, the IRS offers a simple way to minimize this year’s federal income tax liability.
To claim an extra deduction, all you need to do is make your January 2016 mortgage before it comes due to your lender.
Homeowners who make their January 2016 mortgage payment before New Year’s Day can claim a larger mortgage interest tax deduction on their 2015 federal tax returns, and reduce their overall tax bill.
Furthermore, for the more than 6.5 million U.S. homeowners potentially eligible to refinance to today’s low rates, this tax-time tip is especially helpful.
As part of your home loan refinance, your lender may advise that you “roll” your existing loan’s accrued mortgage interest into your new starting loan size, and this may feel like a win because you “skip a mortgage payment”.
It’s not a win, though, and you don't really skip a payment. All you’re doing is deferring your mortgage interest while simultaneously costing yourself a deduction.Verify your new rate (Oct 18th, 2018)
Claim Your Mortgage Interest Tax Deduction
Mortgage lenders like to get paid, and they love to get paid early. It’s one of the reasons why your monthly mortgage statement is delivered about a month before it comes due.
Your next mortgage statement, then, will be on its way soon.
When you receive it — either by mail or electronically — study the statement and you’ll notice that your payment is split into as many as 4 separate 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
- Tax : Partial payments of your annual tax
- Insurance : Partial payment of your annual homeowners insurance bill
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 the interest was paid.
Homeowners can boost their 2015 mortgage interest tax deduction, therefore, by making their January 2016 mortgage payment before the calendar flips to January.
By making your payment in December, your lender will book the interest paid on your to the 2015 tax year, and that interest paid will be included with your IRS Form 1098, which is filed with your taxes.
Unfortunately for homeowners, mortgage insurance, which was tax-deductible for the tax years 2007 through 2014, is no longer tax-deductible.
Not Everyone Gets Mortgage Interest Tax Deductions
Making your January mortgage payment 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.
If you’re unsure, ask an accountant.
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.
Lastly, remember that the bonus tax 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.
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.Verify your new rate (Oct 18th, 2018)
Meeting Your Tax Deduction Deadlines
If you plan to maximize your 2015 mortgage interest tax deductions by making your January 2016 payment in 2015, this year in particular, it’s wise to “do it early”.
As the end of the year approaches, mortgage lenders are notoriously short-staffed. Operations teams use year-end for vacation days and, like many of us in December, are prone to taking days off of work.
Your lender will require extra time to receive and process payments. It’s best to plan ahead.
If you pay your mortgage electronically, or via auto-pay, have your check clear no later than Wednesday, December 23, 2015.
If you send your checks via mail, have your payment stamped and sent no later than Monday, December 21, 2015.
What Are Today’s Mortgage Rates?
A larger tax deduction can save you money, but so can a refinance. Today’s mortgage rates remain near historical lows and the government is currently sponsoring a bevy of “no appraisal” refinance programs. Ask a lender for your options.
Take a look at today’s real mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.Verify your new rate (Oct 18th, 2018)