Early mortgage payment could cut your tax bill

A little year-end attention to your mortgage could lower your upcoming Internal Revenue Service bill.

Your Jan. 1 mortgage payment really represents interest for the month of December, so make the payment by the 31st. By accelerating the payment, you get an additional deduction this tax year for the interest paid.

Make sure you don't cut it too close in making the early payment. Get the check in the mail in plenty of time to arrive at your lender by year's end. If you pay online, be sure you make the electronic transaction in time to have it credited to your 2004 payment amount. That way, the added interest will show up on the annual statement (usually a Form 1098 or an IRS-acceptable substitute) you'll get from your lender in late January detailing your deductible mortgage activity.

Some tax professionals say you can simply make your extra mortgage payment late this month with a check dated Dec. 31 and count it toward your deductions. However, if you actually get your payment to the bank by the last business day of the year (or a day or two early), the extra interest will show up on the lender's official paperwork. And that means no curious tax examiner will question any difference between the amount you claim on your Schedule A and what your lender reported (and copied to the IRS) on the 1098 form. 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.

Source: CBS