Prepaying mortgage to increase this years deduction

Forum|Forum|5 years ago
December 21, 2020
3 replies
14 views

If in December of this year I prepay my mortgage payment due in January and February of next year, can I deduct the interest in this year? I am interested because this year I will itemize, next year I will likely not. I know I have to make sure the money is not going towards the principal.

Bsch4477

Level 15

Prepaid interest.

If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. You can deduct in each year only the interest that qualifies as home mortgage interest for that year. However, there is an exception that applies to points.

Opus 17

Level 15

Probably only January. You would need to contact your lender. The interest payments would have to be reflected on your 1098 form or else the IRS will send a mismatch letter.

You can likely pay your January payment now. The payment would have been billed in December and is probably due January 1 with a 5 day grace period. If you paid extra, such as for February, the lender would probably apply it to principle instead.

NCperson

Level 15

it is unlikely your strategy will work if you are serviced by any of the major servicers... you really can't 'pre-pay' interest. Your monthly payment is for the interest in the month just ended.

Payment due January 1 will be part of 2020 because you are paying December's interest

Payment due February 1 is unlikely to be 2020 interest because it's the interest for the month of January, 2021.

As @Opus 17 points out, some servicers will just hold that payment and not post it until February 1 comes about (so it won't be part of your 2020 interest payments) and others will take that payment that arrived very early and just pay down principle.

Suggest calling the servicer.

Opus 17

Level 15

@NCperson wrote:

it is unlikely your strategy will work if you are serviced by any of the major servicers... you really can't 'pre-pay' interest. Your monthly payment is for the interest in the month just ended.

Well, interest is a tax deduction whenever it is actually paid, not when it is accrued. If you have a typical mortgage on autopay, you make a payment on January 2, which is the interest that accrued in December; an autopay on February 1 (depending on weekends) for interest accrued in January, and so on. So you make 12 interest payments and that shows on your 1098.

If that's how you normally pay, then paying the January bill at the end of December can get you one extra month of interest, assuming the servicer will credit it and add it to your 1098.

You probably can't get more than 1 month ahead. And you would only have 11 months in 2021, unless you pay ahead next year, and so on.