An Extra Perk of Paying Your Mortgage Early


NEW YORK (MainStreet) - Homeowners can make hay while the calendar still shines “2010”. How? By paying their January 2011 mortgage by Dec. 31.

It can be a real head-scratcher, calculation-wise, but the bottom line is this: If you pay your January mortgage payment early (by Dec. 31, 2010), you can increase your tax deductions for 2010.

The numbers work in your favor because of how the tax code treats mortgage interest, which is deductible. Interest accumulates throughout the month, and your mortgage bill actually looks backward – billing you for interest accumulated through the previous 30 days. In essence, your January 2011 mortgage bill includes accrued interest from December 2010.

Tax accountants call this “accelerating” your tax deductions. By and large, taxpayers benefit by shifting their mortgage deductions back from January 2011 to December 2011. Any tax deduction you can itemize (and mortgage deductions, along with charitable contributions and state and local taxes are at the top of that list), are worth exploring, so let’s do just that.

A caveat. Before you go after the tax deduction, be aware that the Internal Revenue Service, in its infinite wisdom, has some trap doors and firewalls in place that could impact your ability to claim the deduction. While we’ll list those below, it’s a good idea to check with a tax specialist if you have any questions.

Your first step is to make sure you’re eligible for the mortgage tax deduction. The IRS has a helpful web page that lists who qualifies and who doesn’t. If, for example, you try to get the tax deduction for a second home that you rent out, you won’t qualify for the deduction. The IRS does a good job of listing who qualifies and who doesn’t, so make sure to check out the web page listed above.

The second step is to watch out for the Alternative Minimum Tax (AMT). The AMT has a way of curbing the deductions taxpayers can claim, and the mortgage tax deduction could be reduced for taxpayers using the AMT.

In addition, the deduction is only good for one month – January 2011. If you try to pay February and March’s mortgage early, for example, and claim that interest on your taxes as a deduction, the IRS will have a problem. In virtually all cases, any prepayment that goes beyond a one-month payment period is considered a “pre-payment” and thus cannot list mortgage interest as tax deductible.

We only have a few days left until Dec. 31. So don’t wait until the last minute, check your tax status and, if it’s all speed ahead, go ahead and claim the deduction by paying your January mortgage early. Make sure to check with your mortgage servicer to confirm receipt of payment prior to Dec. 31.

If you qualify, the early payment is one of the best ways to get 2011 off the ground in a financially beneficial manner.

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