This is a quick follow-up to my email to subscribers yesterday. I said I wasn’t sure whether making the mortgage payment due on January 1 in December would save taxes when you will switch from itemizing deductions in 2017 to using the standard deduction in 2018 due to the new tax law. I did some research afterwards and the answer is yes.
This doesn’t affect you if you already take the standard deduction in 2017 no matter what or if you will continue to itemize in both 2017 and 2018 no matter what. It only works when you will switch from itemizing in 2017 to using the standard deduction in 2018.
For the mortgage interest to count as a 2017 deduction, two conditions must be met: (1) the interest must be already incurred; and (2) the interest is actually paid in 2017. A typical home mortgage charges interest in arrears. The December interest is due on January 1 and you typically have a 15-day grace period to pay.
If you paid your December 2016 interest in the first half of January 2017, that counts as a 2017 deduction. If you pay your December 2017 interest in December 2017, that also counts as a 2017 deduction. If you wait until January 2018 that would count as a 2018 deduction. With the new $10,000 limit on deducting state and local taxes and the expanded standard deduction in 2018, you may not get any additional deduction for your mortgage interest when you switch to the standard deduction in 2018. If that’s the case for you, making your mortgage payment due on January 1 in December will save you some money.
When you make the payment, make sure the bank takes it as a regular payment against the payment due to January 1, not as a one-time extra principal payment. My mortgage is with Chase. I had to first stop the auto pay scheduled on the 5th of each month and then schedule a payment on December 26. After the payment goes through, I will set up the auto pay again starting in February 2018.
It only works for this one payment. The January 2018 interest due on Feb. 1, 2018 hasn’t been incurred yet. Paying extra now to have your bank wait and apply it to the payment due on Feb. 1, 2018 doesn’t make it deductible in 2017.
Similarly, if the 2018 property tax bill hasn’t come out yet, prepaying now to just have the local government hang on to the money doesn’t make it deductible in 2017. If the property tax bill has already come out, paying it in 2017 may help, but it doesn’t work if you are on AMT in 2017. If you weren’t on AMT before, accelerating the property tax payment may also get you on AMT in 2017, which takes away part of the benefits of accelerating the payment.