I made a 13th mortgage payment in December of 2008, with the intent of getting the interest applied to my 2008 taxes. Since I always pay my mortgage at least two weeks early, it was actually the payment due February 1st 2009.
My 2008 year end statement is already available online. They do list the prepaid interest, but much to my surprise it was subtracted from the amount that was reported to the IRS.
Is that the law? Can I not deduct the interest that I actually paid in
Mortgage interest is paid in arrears. That is why one can make the January payment in December and get to deduct it. You are paying the Dec. interest. You can not deduct Jan. interest (your Feb. payment) that you pay in Dec., because tax law does not allow you to deduct prepaid interest under these circumstances.
One exception to the "not being able to deduct prepaid interest" rule, is the ability under the right set of circumstances to deduct in full points you pay on a mortgage to acquire or build your home.
Probably not. See "Prepaid Interest" in Pub 936. Essentially, you only can pay interest on a mortgage after it accrues, and it hadn't accrued yet in 2008.
That being said, I do not much trust most form 1098's, and would always go with my own calculation if I can substantiate it.
To OP: Are you sure the bank didn't apply the extra payment to principal? That would make more sense.
If you have *always* paid two weeks early, you already got the benefit of accelerating one monthly interest payment in the year you originated your loan. Typically the first monthly payment isn't due until the second month after you originated your loan. For example, take out the loan on Jan 15th (including pro-rated interest for the remainder of January), make your regular payments monthly payments beginning March
1st, and you have 10.5 months worth of interest to deduct. Presumably you made an early payment in December of that year and got 11.5 months, in this example.
One frequently reads year-end tax tips in the mass media that suggest increasing your property tax or mortgage interest deductions by paying them in December. What they don't mention is that this only works once, and somewhere down the line, you have to make up for it in the other direction. In your case, if you ever reverted to paying on the due date (during the grace period), you would only have eleven months of interest to deduct for that year.
Although not a tax issue, I can't imagine why you always pay early. You are essentially taking the interest you could be earning on the money and giving it to the bank. If you want to pay more, you should be having it applied to reduce your principal, which in turn would reduce your total interest paid, much better than getting a tax deduction.
That might be true for tuition payment Form 1098-T, but are you saying it is not rare for you to find errors in Form 1098 (mortgage interest), or 1098-E (student loan interest)?
If you are going to deduct more interest than shown on a 1098, I think the IRS always expects an explanation of some sort (such as a payee's tax ID) so they can make sure the party on the other side reports the income.
The typical cycle is that the payment you send for the Jan 1 due date, hits in the first week of January and you are credited as paying the accrued December interest in the next year. The 13th payment trick is to make the January 1 due payment so the bank gets it before 12/31 and it's credited in that year.
As I've seen, banks do not (usually) credit early payments, or for that matter, late payments up to the grace period, to impact the interest accrued or change the amortization. I had one mortgage that offered to auto debit my checking, and the online system allowed a payment up to the 15th of the month due. So I accrued a bit of interest on that extra float. But an early payment would have saved me nothing.
I don't have a lot of datapoints, but the 1098's I have received were almost always incorrect. In all cases I was pre-paying principal at intervals. I expect they'd have been correct if I was only making minimum payments.
That is part of what made me think that an extra payment was deductible. Given that points are deductible, I paid it in 2008 (and the check did clear in 2008) it just seemed intuitively obvious.
Anyway, thanks to you and everyone who replied. I am now both understanding why and convinced that the 13th payment wasn't deductible this year. Live and learn.
Yes, I'm sure that they didn't. The bank in question is BB&T, and after logging in I can see how payments are applied. Also lots of other helpful stuff like amortization tables, escrow history and balance, next payment due date, and year to date principal and interest.
Due to forced overtime, I often work a ridiculous number of hours. The bank is on the way to work, and I pay at the counter each month. I like to pay early because once I pay it is one less thing to worry about.
I agree. I am paying it off early, with an extra principal payment each month sufficient to pay the 30 year loan off in 10 years.
I know lots of people say that isn't wise, that the money should be invested elsewhere, but I have my reasons. I didn't want a 10 or 15 year mortgage because I want the fall back of the 30 year payment, if I need it. And I want to retire (I'm in my early 50's) a few years after I pay off the mortgage.
Plus I am investing in other areas. For instance a few months ago I doubled my 401k contribution. Even though I lost 48% of my balance in
2008, I am hopeful that when stock price is down value is up and it is time to buy.
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