Early year-end mortgage payment can cut taxes |
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If your year-end mortgage statement doesn't reflect the extra payment's interest, go ahead and deduct the correct amount on your tax return and attach a statement explaining why your number, not the lender's, is accurate.
If your mortgage holder pays your annual property tax bill from an escrow account, that also will be listed as a deductible home-related expense on your Form 1098. But if you, not your 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 pay
A word -- actually, three words -- of warning about accelerating some tax payments: alternative minimum tax. This parallel tax system was devised almost 40 years ago to guarantee that wealthy filers paid their fair share to the IRS. But nowadays, literally millions of middle-class filers are finding the AMT applies to them.
There are a couple of reasons so many taxpayers now potentially face the AMT. First, the parallel tax system isn't indexed for inflation. Without that annual adjustment, regular income increases have pushed many filers, particularly those in high-tax states such as New York and California, close to or into the earnings level where the AMT kicks in. So annually for the last few years, lawmakers have increased the income amount that is exempt from the AMT.
Thanks to the latest law change, the 2008 AMT income exclusions are $69,950 for married taxpayers filing a joint return, $46,200 for single or head-of-household taxpayers and $34,975 for married taxpayers filing separate returns. The income exemption increases took around 22 million potential victims off the AMT rolls.
Secondly, under the AMT, some usually acceptable tax breaks aren't allowed. Mortgage interest on your main and second home is still AMT-deductible, but home equity loan interest could be disallowed. And real estate and personal property taxes aren't deductible under the AMT. So before you shift payment of those taxes into this year, make sure you won't face an AMT bill where the write-offs won't be of any tax use.
Also be careful about accelerating deductions if you've earned a lot this year.
Taxpayers with adjusted gross incomes of more than $159,950 ($79,975 if married and filing separately) could find their itemized deductions amount reduced. There's a work sheet in the Form 1040 instruction booklet to help you determine if you'll face the deduction limitation. If you do, it makes no sense to pull deductions you won't be able to fully use into this tax year.
And remember: While an early payment will give you 13 mortgage interest amounts to deduct this year, it means that on your 2009 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 the added deduction amount on this coming return.
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