Tuesday, December 27, 2011

Want bigger tax deductions for 2011?

Consider making your upcoming January 2012 mortgage payment a few days early.

Work U.S. Tax Code To Your Benefit

It's late-December and you've likely received your lender's January mortgage statement. Study it, and you'll notice that the payment is broken into as many as 4 parts :
  1. Principal : A partial repayment on the original monies borrowed
  2. Interest : Based on your mortgage rate, a payment for the right to borrow said monies
  3. Escrow : Partial payments of your annual tax and/or hazard insurance bill
  4. Mortgage Insurance : For some FHA and conventional loans, a payment to insure the loan against loss 
The key part here for tax purposes is the "Interest" section. For many homeowners,  mortgage interest is tax-deductible in the year in which it was paid.
You can boost your 2011 mortgage interest tax deduction, therefore, by making your January 2012 mortgage payment before the New Year hits. That way, your interest paid will be booked to 2011, and included on your IRS Form 1098.  
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Paying Your Mortgage Early? Know The Pitfalls.

Rushing to make that January mortgage payment in December? Not so fast. Remember, this is federal tax code we're dealing with. There will always be caveats, exceptions and special cases to thwart your eligibility for mortgage interest tax deductions.

For example, not every mortgage is mortgage interest tax deduction-eligible.  The IRS outlines mortgage interest tax deduction eligibility via this flowchart. Follow along at-home to make sure your loan qualifies.

In addition, because of the Alternative Minimum Tax (AMT), some tax filers find that their "normal" tax deductions get pared -- including those related to the mortgage.  This may reduce the benefits of making January's mortgage payment in December.
And, lastly, don't get ambitious.
The IRS allows you to make (and claim) January's mortgage payment in December because that's when the mortgage payment is actually due. If you attempted to pay February in advance, too, it will be in vain. This is because making your February mortgage in December (i.e. before the mortgage interest has actually accrued) is considered to be a "prepayment" of a mortgage.
Prepaid mortgage interest is rarely tax-deductible in cases like this.
Click here to get a mortgage rate quote.

Fewer Days Remaining To Claim Your Bigger Tax Refund

If you want to pay your January 2012 mortgage statement early, make sure you "do it early". The end of the year is approaching and mortgage lenders are short-staffed. You want to give your lender ample time to receive and process your paperwork.
If you pay your mortgage electronically, or via auto-pay, try to have your check clear no later than December 30.
And, lastly, please do not accept the above as tax advice; it's just one method of maximizing tax credits and it can't be used by everyone. If you're planning to prepay your home loan, talk to your accountant first.
The "pay early" plan could be a waste depending on your particular taxpayer profile.

Bonus : Lower Your Annual Mortgage Bill

Mortgage rates have dropped through most of 2011. Since peaking in February, conventional and FHA rates have shed more than a full percentage point.
The plus-side is that mortgage payments are lower everywhere; homeowners are saving $202 per month on a basic, 30-year fixed $300,000 mortgage. The down-side, however, is that, with lower mortgage rates, there's less mortgage interest due each month.
This is a good thing. Better than increasing your mortgage interest tax deductions is to actually pay less mortgage interest.  Get started with a rate quote and see how you can lower your mortgage payments to the bank. Original Article Content Written by: Dan Green
Click here to get a mortgage rate quote.

The views, opinions, positions or strategies expressed by the authors and those providing comments or external internet links are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of First Capital, we make no representations as to accuracy, completeness, current, suitability, or validity of this information and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All registered trademarks, copyright, images, or other items used are property of their respective owner and are used for editorial purposes only.

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