A little year-endattention to your mortgage could lower your upcoming Internal RevenueService bill.
Unlike rent, which you pay beforehand (i.e., your Jan. 1 billcovers your stay in the rental unit for that coming month), yourmortgage payments are made at the end of your occupancy period. Thatmeans your Jan. 1 mortgage statement represents interest for the monthof December, making it a tax-break-eligible bill for this year. Byaccelerating that payment even by just a day (Dec. 31), you get anadditional deduction for the interest paid.
Make sure you don't cut it too close in making the earlypayment. Get the check in the mail in plenty of time to arrive at yourlender by year's end. If you pay online, be sure you make theelectronic transaction in time to have it credited to your 2005 paymentamount. That way, the added interest will show up on the annualstatement (usually a Form 1098 or an IRS-acceptable substitute) you'llget from your lender, in late January, detailing your deductiblemortgage activity.
Some tax professionals say you can simply make your extramortgage payment late this month with a check dated Dec. 31 and countit toward your deductions.
However, if you actually get your payment to the bank by thelast business day of the year (or a day or two early), the extrainterest will show up on the lender's official paperwork. And thatmeans no curious tax examiner will question any difference between theamount you claim on your Schedule A and what your lender reported (andcopied to the IRS) on the 1098 form. If your year-end mortgagestatement doesn't reflect the extra payment's interest, go ahead anddeduct the correct amount on your tax return and attach a statementexplaining why your number, not the lender's, is accurate.
If your mortgage holder pays your annual propertytax bill from an escrow account, that also will be listed asa deductible home-related expense on your Form 1098. But if you, notyour lender, pay your property tax bill, and it's due early next year,consider paying it in December, too. As with your mortgage interest,this payment -- and deduction -- will be shifted into this tax year.When shifting deductions doesn't payA word -- actually, three words -- of warning aboutaccelerating some tax payments: alternativeminimum tax.This parallel tax system was devised more than 30 years ago toguarantee that wealthy filers paid their fair share to the IRS. Butnowadays, more middle-class filers are finding the AMT applies to them,in large part because the alternate system isn't designed to keep upwith inflation.Under the AMT, some usually acceptable tax breaks, includingrealestate and personal property taxes, aren't allowed. Before you shiftpayment of extra taxes into this year, make sure you won't face an AMTbill where they wouldn't be deductible.And be careful about accelerating deductions if you've earneda lot this year.Taxpayers with adjusted gross incomes of more than $145,950($72,975 if married and filing separately) could find their itemizeddeductions amount reduced. There's a work sheet in the Form 1040instruction booklet to help you determine if you'll face the deductionlimitation. If you do, it makes no sense to pull deductions you won'tbe able to fully use into this tax year.
And remember: While an early payment will give you 13 mortgageinterest amounts to deduct this year, it means that on your 2006 taxes,you'll only have 11 (or 12 if you pay a little early next December,too). So before you send off that check, make sure you really need theadded deduction amount on this coming return. Bankrate.comis theWeb's leading aggregator of information on financial products includingmortgages, credit cards, new and used automobile loans, money marketaccounts, certificates of deposit, checking and ATM fees, home equityloans and online banking fees. Visit Bankrate.comto get the tools and information that can help you make the bestfinancial decisions.
Source: Money & Work
