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How to Put Payments to Your Advantage

Paying the January Mortgage Early

By Kat DeLong

If money is extra tight this year, consider sending your January mortgage payment a few days early. Watching the tax deductions increase when April rolls around will be a nice treat.

Fact: A mortgage is paid after living in your home. Unlike renters who pay on the first of the month for that month, homeowners pay mortgage for the month that has just passed. So the January mortgage payment pays for December. Most of the time this is a trivial detail, but by paying your January payment early you apply the tax deduction for the interest payment to the current year. This will give you 13 mortgage and interest payments for the year instead of 12 payments.

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Paying the January Mortgage Now: How it Works
The key to this system is paying on time. Every year, your lender will file an IRS 1098 form listing the interest you paid on your mortgage, which can then be deducted from your income tax. Send the payment early enough so it goes on the lender's statement and makes the lender's books by December 31st (or the closest workday).

While it may be tempting to pay February and March as well, only your January payment will boost your deductions. The IRS will usually prohibit writing off pre-paid interest payments.

This tax deduction tip will only work for one year. Giving your January mortgage payment in December will give you 13 payments for the current year. The following year, you will have 11 mortgage payments, unless you prepay the following January as well, which gives you 12 payments.

Pay Property Taxes in December: More Deductions
In addition to the above tip, look to your property taxes to boost deductions. If you pay your property taxes yourself, you will have a portion due early in the year. Paying that portion before the end of December will add it to your IRS deductions. But if your lender pays your property taxes as part of your monthly mortgage payments, you can't do anything to boost the deductions.

Early Payments: Not for Everyone
A word of caution for those eligible for the alternative minimum tax (AMT): Some of the tax breaks available to homeowners in standard tax brackets may not be taken by taxpayers paying the AMT. Paying early in this case won't help. Most of the time, mortgage interest on your home is still deductable, but equity loan interest payments may not be eligible.

This tax deduction trick isn't magic -- you are essentially borrowing from yourself. On the other hand, if having extra deductions in April makes your life easier, it is something to consider.

Disclaimer: The information on this website and from any communication related to this website is for informational and entertainment purposes only. The material on and related to this website does not constitute advice and should not be relied upon. You should not rely on any material on this website to make (or refrain from making) any decision or take (or refrain from taking) any action. Consult your tax professional for investment and tax advice.


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