Equifax

Finance Blog

Maximizing Extra Mortgage Payments and Tax Deductions

Written by Eva Rosenberg on December 24, 2012 in Tax  |   No comments

The other day, someone asked me about prepaying next year’s rent on his business. That sounded like a pretty good idea to him because he said he could really use the tax deduction this year. Wouldn’t it be terrific if this concept could really work?…

mortgage tax deductionThe other day, someone asked me about prepaying next year’s rent on his business. That sounded like a pretty good idea to him because he said he could really use the tax deduction this year. Wouldn’t it be terrific if this concept could really work?

Basically, cash-basis taxpayers do get to deduct their payments in the year that the payments are made—unless the payments are made too early. Alas, this gentleman was only permitted to deduct the January payment early, with the rest being deductible in 2013.

The benefit of making key payments at the end of the year

You’ll find all kinds of articles telling you to maximize your deductions by paying key expenses for 2013 in December 2012 (including one of my blog posts). If you make the January payment right at the end of December, so check is actually posted in December, you’ll get the biggest benefit. All the interest for the month of December will have accrued, and you’ll get the deduction for the interest you have paid (not for the payment itself).

Suppose you make your payments early—doubling up the December payment at the beginning of the month, for example. In this case, you’ll get no extra benefit—the regular December payment is already applied against all the interest that had accrued over November.

The benefit of making extra or increased mortgage payments

You will get a big benefit to making extra mortgage payments, though. Add an additional 5 percent or more to your monthly mortgage payment and that extra amount will be applied to principal. This will reduce your overall loan balance and the number of months it will take to pay off the loan.

Try out the numbers with a loan amortization calculator. Enter your present loan balance, your interest rate, and the amount of your payment. The calculator will then show you how long it will take to pay off your loan. Now, increase your loan payment to something you could still afford to pay, such as an extra $50 or $100.

For instance, a $150,000 loan at 5 percent interest with a payment of $805.23 will take 360 months to pay off, including $139,882.80 in interest. Change the payment to $855.23 and ta-dah, you end with 45 fewer payments and save nearly $20,000 interest expenses. Add on an extra $100 per month and you would save 78 payments (more than six years) and over $35,000 in interest.

True, your mortgage interest deduction will get smaller and smaller—but think of all the money you’ll get to get to enjoy once the mortgage payments stop!

Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

No comments yet


Leave a Comment


Name :


Commenting guidelines

We welcome your interest and participation on this forum, but be aware that comments will be published at Equifax's sole discretion. Please don't use this blog to submit questions or concerns about your Equifax credit report or raise customer service issues. Instead, you should contact Equifax directly for all such matters and any attempts to do so in this forum will be promptly re-directed.

Some other factors to consider when commenting:
  1. Registration and privacy. While no registration is required to visit our forum, participants wishing to post a message must register by creating an account. All personal information provided by forum members incident to registration is governed by our Terms of Use and Privacy Policy.
  2. All comments are anonymous. We'll delete your name, e-mail address, and any other identifying information, including details about your investments.
  3. We can't post or respond to every comment - As much as we'd like to, we can't post every comment, nor can we guarantee that we will respond to each individual message. All questions or comments about your Equifax credit report or similar customer service issues should be handled by contacting Equifax directly.
  4. Don't offer specific legal, tax or financial advice. All of the materials on this Site are for information, education, and noncommercial purposes only and this forum is not intended as a means of expressing views or ideas regarding any specific legal, tax, or investment advice. While offering general rules of thumb is both permitted and encouraged, recommending specific ideas or strategies regarding investments, taxes, and related matters is prohibited.
  5. Credit Repair. This blog is not intended as a venue for the discussion or exchange of ideas regarding credit repair or other strategies intended to assist visitors and community members improve or otherwise modify their credit histories, ratings or scores.
  6. Stay on topic. Your comment should be concise and pertain to the specific post in question.
  7. Be respectful of the community. The use of profanity, offensive language, spam, and personal attacks will not be tolerated and egregious or repeat offenders will be banned from future participation. We encourage disagreement and healthy debate, but please refrain from personal attacks on our WordPresss and contributors.
  8. Finally: Participation in this forum may be terminated by Equifax immediately and without notice for failure to comply with any guidelines or Terms of Use. As such, you should familiarize yourself with all pertinent requirements prior to submitting any response through the blog or otherwise. All opinions expressed in this forum are solely those of the individual submitting the comment, and don't necessarily represent the views of Equifax or its management.

Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.


Tax Archive

Stay Informed Sign up for our FREE Equifax email Newsletter