Is there any benefit to waiting until 2021 to repay a mortgage forbearance? I would assume that the interest deduction is not possible as a result of forbearance?

[lotothezo-gmail-]

I have the option to pay forbearance back in full before 12/31/20 and wondering if there is any benefit to wait until 2021 or should I pay it in full and receive all mortgage interest credit for 2020. Thanks

[tbrown21]

Pausing your mortgage payments has nothing to do with your qualifying mortgage interest that you pay. If you pay interest in 2020 you can take the interest as an itemized deduction if you itemize. Whether there is a benefit for you to pay the full amount in 2020 or wait until 2021depends on your filling status, income, other deductions, ETC. In other words no one can tell you if it is beneficial without your complete tax info. 

[xmasbaby0 · Accepted solution]

Will you have enough itemized deductions for 2020 to make a difference in your tax due or refund if you can enter the mortgage interest?  Your itemized deductions must exceed your standard deduction or they have no effect on the results.  Remember that there is a cap on the deduction for state and local tax, and a high threshold for medical expenses.

STANDARD DEDUCTION

Many taxpayers are surprised because their itemized deductions are not having the same effect as they did on past tax returns.  The new higher standard deduction and the elimination of certain deductions, as well as the cap on state and local taxes have had a major impact since the new tax laws went into effect beginning with 2018 returns.

Your itemized deductions have to be more than your standard deduction before you will see a change in your tax owed or tax refund.  The deductions you enter do not necessarily count “dollar for dollar;” many of them are subject to meeting  tough thresholds—medical expenses, for example, must meet a threshold that is pretty hard to reach.  The software program uses all the IRS rules that apply to the expenses you enter, and it tells you if you have enough to use your itemized deductions or if using the standard deduction is more advantageous for you.  Under the new tax laws, some deductions have been capped—there is a $10,000 limit to the itemized deductions for state, local, property and sales taxes.

Your standard deduction lowers your taxable income.  It is not a refund. 

2020 Standard Deduction Amounts

Single $12,400   (+ $1650 65 or older)

Married Filing Separate  $12,400   (+ $1300 if 65 or older)

Married Filing Jointly $24,800   (+ $1300 for each spouse 65 or older)

Head of Household $18,650  (+ $1650 for 65 or older)

[lotothezo-gmail-]

Thank you! So yes for 2020, if I pay the lumpsum then it will trigger itemized deductions for this year, without paying the interest this year, it will keep me below the standard deduction limit. Based on the math I could lump sum the 20ish k or defer and pay an additional couple grand in taxes for 2020.

[Carl]

I have the option to pay forbearance back in full before 12/31/20

Assuming 12/31/20 is your "drop dead" date to pay it back with no penalties, if you elect to pay it back after that date then the late fees and penalties that may be assessed are just flat out not deductible at all, on any tax return. Additionally, depending on the forbearance agreement details, the lender may be able to take other actions (such as foreclosure with no recourse.)

What you might want to consider (if offered as an option in your forbearance agreement) is either tacking the missed payments to the end of the loan period, or just refinancing altogether.

You really need to find out "ALL" your options so that you can make a well informed and educated decision on what is best for your situation. You, and only you can make that determination.

[Opus 17]

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@lotothezo-gmail- wrote:

Thank you! So yes for 2020, if I pay the lumpsum then it will trigger itemized deductions for this year, without paying the interest this year, it will keep me below the standard deduction limit. Based on the math I could lump sum the 20ish k or defer and pay an additional couple grand in taxes for 2020.

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For income tax purposes only, interest is deductible when it is actually paid.  There might be advantage to paying in 2020, or paying in 2021 along with your 2021 interest, that can only be assessed by someone with all your tax facts.  If late payment triggers penalties, those penalties are not tax-deductible.

Separately, how's your credit report?  Planning any borrowing in the next couple of years?  There may be important non-tax reasons to pay the debt on time.