For many American homeowners, interest paid on a mortgage is tax-deductible in the year in which it was paid.
Knowing that, eligible homeowners can increase their 2009 tax deductions just by making their January 2010 mortgage payment before the end of the year.
By paying in 2009, the mortgage interest paid can be applied against 2009’s itemized tax deductions even though the payment isn’t technically due until 2010.
It can reduce your tax burden come Thursday, April 15, 2010.
And lest you think you’re paying the mortgage “in advance”, remember that mortgage interest is paid in arrears; a payment due January 1 accounts for interest that accumulated in December 2009 anyway.
Tax planning is a complicated issue and not all homeowners qualify for mortgage interest tax deductions. Check with your tax professional before making tax planning decisions.
If you don’t have an accountant you trust, call or email me anytime; I’m happy to make a recommendation to you.
An oft-touted benefit of homeownership is its tax benefits. However, like most IRS-related items, understanding how the benefits work is not always clear.
In general, homeowners are entitled to two home-related tax deductions — one for annual mortgage interest paid, and one for real estate tax bills paid.
Not everyone is eligible, though. Some of the exclusionary traits include total amount borrowed, and whether or not the home is a primary or secondary residence.
The official IRS publication is filled with notes and explanations but, in general, you can calculate your approximate mortgage interest tax deduction using the following math:
This is grossly simplified, but fairly accurate.
As an example, a homeowner paying a combined $20,000 in 2008 mortgage interest and real estate taxes, and who is in the 28% tax bracket, may be due $5,600 in tax credits.
The availability of mortgage interest tax deductions is one reason why loan officers make reference to “after-tax mortgage rates”. An after-tax mortgage rate is effective interest rate, post-tax code, and can be calculated using the formula below:
(After-Tax Mortgage Rate) = (Mortgage Rate) * (1 - Marginal Tax Rate)
The same homeowner with a 5.000% mortgage rate, therefore, has an after-tax mortgage rate of 3.600%.
Because not every homeowner is eligible for home-related deductions, and because not every homeowner should claim them, talk with your personal accountant before making any tax-related decisions.
For most Americans, mortgage interest paid on a home loan is tax-deductible in the year in which it was paid.
With advance planning, therefore, homeowners can increase their 2008 tax deductions and limit their tax liability on April 15.
The key is to make the January 2009 mortgage payment before the New Year begins.
In making the payment in 2008, the payment’s mortgage interest is applied against this year’s tax deductions instead of next year’s. And lest you think you’re paying “in advance”, remember that mortgage interest is paid in arrears; a payment due January 1 accounts for interest that accumulated in December 2008 anyway.
Tax planning is a complicated issue and not all homeowners will qualify for mortgage interest tax deductions. Check with your tax professional before making tax planning decisions.
If you don’t have an accountant you trust, call or email me (240-223-1730 tim@timromp.com) anytime; I’m happy to make a recommendation to you.
First Heritage Mortgage, LLC
6550 Rock Spring Drive, Suite 260, Bethesda, Maryland 20817-1131
Direct: 240.223.1730 • Toll-free: 866.833.LOAN • Fax: 240.223.1703
