Itemizing

[aaronc879]

I have never been able to itemize before but should be able to now. I recently bought a home but don't have much interest paid for 2016. 2017 should be the first year I can itemize. Would it make sense to wait to pay my property tax until after Jan 1st then pay next years property tax before Jan 1st? Anything else a new homeowner can do to maximize the tax break?

 

[Texas Proud]

Yes...


I double up all the time... take itemized every two years and the standard deduction in between.... save me money....


Well, I should say it saved me money as I now do not pay fed income taxes....

 

[RunningBum]

Did you verify that you don't have enough deductions from the house closing costs to make schedule A worthwhile this year? Points on your loan, if you had any, are what come to my mind.

 

[aaronc879]

Did you verify that you don't have enough deductions from the house closing costs to make schedule A worthwhile this year? Points on your loan, if you had any, are what come to my mind.

No points on my loan. I would definitely be short this year. Even with a full year's worth of taxes and interest I still won't go a lot over the standard deduction. My mortgage is only $88K.

 

[GrayHare]

Yes, bunching deductions into alternate years is a viable strategy. Keep in mind there has been discussion about modifying year 2017 Sched A; possibilities include eliminating most types of deductions, or capping their total.

 

[RunningBum]

Sounds good. If your mortgage is due on the 1st of the month, see if you can pay right on Jan 1 rather than late Dec. You probably even have til Jan 5 to pay without penalty. Then next December look at making that payment in late Dec rather than Jan 1, as well as next year's property taxes, and then don't itemize in 2018. Every other year like that will probably work best for you.

Same thing for car taxes (personal property tax) and any charitable contributions you make. Stack them in an itemizing year. Took a look at Sched A and see if anything else applies. Medical bills is probably the next most likely, but you probably can't control the timing of those very much.

You were talking about insulating your attic in another thread, IIRC, and I think you can get a credit for that. I'm not sure if that goes on Sched A also, or if it's a credit independent of itemizing, but if the latter, try to do that next year rather than a non-itemizing year.

 

[aaronc879]

Sounds good. If your mortgage is due on the 1st of the month, see if you can pay right on Jan 1 rather than late Dec. You probably even have til Jan 5 to pay without penalty. Then next December look at making that payment in late Dec rather than Jan 1, as well as next year's property taxes, and then don't itemize in 2018. Every other year like that will probably work best for you.

Same thing for car taxes (personal property tax) and any charitable contributions you make. Stack them in an itemizing year. Took a look at Sched A and see if anything else applies. Medical bills is probably the next most likely, but you probably can't control the timing of those very much.

You were talking about insulating your attic in another thread, IIRC, and I think you can get a credit for that. I'm not sure if that goes on Sched A also, or if it's a credit independent of itemizing, but if the latter, try to do that next year rather than a non-itemizing year.

Thanks for the tips. Very helpful. I'll check out Sched A and make sure i'm getting all I can.

 

[Senator]

Sounds good. If your mortgage is due on the 1st of the month, see if you can pay right on Jan 1 rather than late Dec. You probably even have til Jan 5 to pay without penalty. Then next December look at making that payment in late Dec rather than Jan 1, as well as next year's property taxes, and then don't itemize in 2018. Every other year like that will probably work best for you.

Same thing for car taxes (personal property tax) and any charitable contributions you make. Stack them in an itemizing year. Took a look at Sched A and see if anything else applies. Medical bills is probably the next most likely, but you probably can't control the timing of those very much.

You were talking about insulating your attic in another thread, IIRC, and I think you can get a credit for that. I'm not sure if that goes on Sched A also, or if it's a credit independent of itemizing, but if the latter, try to do that next year rather than a non-itemizing year.

I think the mortgage idea doesn't work.

Interest on a monthly compounding mortgage is calculated by the amount you owe at the end of the month. A 1098 statement is mailed based on the interest paid.

I think even if you pay ahead, it doesn't count on the 1098 as you did not really owe the interest yet It's just an early payment.

The other are great ideas.

 

[MissMolly]

I think the mortgage idea doesn't work.

Interest on a monthly compounding mortgage is calculated by the amount you owe at the end of the month. A 1098 statement is mailed based on the interest paid.

I think even if you pay ahead, it doesn't count on the 1098 as you did not really owe the interest yet It's just an early payment.

The other are great ideas.

Actually, interest paid ahead does count for the January payment. Since interest is paid in arrears, it accrues before Dec 31, therefore, as long as it is paid before Dec 31 you can claim it in the year it was paid.

 

[athena53]

Actually, interest paid ahead does count for the January payment. Since interest is paid in arrears, it accrues before Dec 31, therefore, as long as it is paid before Dec 31 you can claim it in the year it was paid.

Personal taxes are on a cash basis. I'm betting you could make more than one payment in advance before the end of the year and the interest would all count. Whether the bank's computer would treat it correctly is another matter. I could picture them treating, say, the February payment made in December as 100% principal and you'd have a real mess to sort out.

 

[athena53]

Did you verify that you don't have enough deductions from the house closing costs to make schedule A worthwhile this year? Points on your loan, if you had any, are what come to my mind.

Property taxes are frequently paid at closing, too. If your state collects them in advance, you may have paid the seller a pro-rata portion of the taxes they already paid. Let's say taxes are due 1/1/2016 for all of 2016. Your seller paid the taxes due on 1/1 and you bought on 7/1. Your closing costs would have included half the taxes they paid and that's a deduction for you.

 

[MissMolly]

Personal taxes are on a cash basis. I'm betting you could make more than one payment in advance before the end of the year and the interest would all count. Whether the bank's computer would treat it correctly is another matter. I could picture them treating, say, the February payment made in December as 100% principal and you'd have a real mess to sort out.

If you read the rules regarding reporting 1098 mortgage interest you will find that only interest which accrues prior to Dec 31 and is paid before Dec 31 can be deducted. Therefore, the payment due February, even if paid in Dec, is not deductible since it does not accrue until January. This has nothing to do with how the banks computers are designed. It's an IRS regulation.

 

[gerntz]

I have never been able to itemize before but should be able to now. I recently bought a home but don't have much interest paid for 2016. 2017 should be the first year I can itemize. Would it make sense to wait to pay my property tax until after Jan 1st then pay next years property tax before Jan 1st? Anything else a new homeowner can do to maximize the tax break?

That depends on the penalty, if any, for waiting. We have a county & city tax bill. The penalty for waiting on the county bill is small & so we do. The penalty for waiting on the city bill is larger than our tax rate & so we don't.

 

[scrabbler1]

A few years ago, I was able to bunch my deductions because they were right around the standard deduction and just enough of them I could shift between two consecutive years to make it worthwhile. But now my deductions have risen slightly so that even if I were to bunch them I'd still be itemizing each year and not take advantage of the "bump-up" value of taking the standard deduction in alternating years.

 

[Senator]

Actually, interest paid ahead does count for the January payment. Since interest is paid in arrears, it accrues before Dec 31, therefore, as long as it is paid before Dec 31 you can claim it in the year it was paid.

I agree, but I am not sure how the bank accounts for it. The December interest may already factored in, or the previous January's payment. The bank's processing that determines interest runs at the end of the month, likely starting on 12/31 and your payment would have to be in by that time. Even then, it may not be on the 1098. I would be hesitant to deduct interest that was not on the 1098.

I suspect that the payment, no matter when it is received as a regular payment, is credited like it was received on the first of the month.

I do not know if the 1098 reflects what is paid by the date received, or if it is what accrued based on the amortization tables. If you paid all of the next year, would the 1098 reflect that? Probably not.

It's a great question.

 

[NW-Bound]

I agree, but I am not sure how the bank accounts for it. The December interest may already factored in, or the previous January's payment. The bank's processing that determines interest runs at the end of the month, likely starting on 12/31 and your payment would have to be in by that time. Even then, it may not be on the 1098. I would be hesitant to deduct interest that was not on the 1098.

I suspect that the payment, no matter when it is received as a regular payment, is credited like it was received on the first of the month.

I do not know if the 1098 reflects what is paid by the date received, or if it is what accrued based on the amortization tables. If you paid all of the next year, would the 1098 reflect that? Probably not.

It's a great question.

In addition, when I had a mortgage the real-estate tax was paid out of escrow twice a year, according to the county schedule. There's no way I can pay it in advance.

Now, I pay real estate tax myself, and I can only pay when the county sends me a bill.

 

[braumeister]

If you read the rules regarding reporting 1098 mortgage interest you will find that only interest which accrues prior to Dec 31 and is paid before Dec 31 can be deducted. Therefore, the payment due February, even if paid in Dec, is not deductible since it does not accrue until January. This has nothing to do with how the banks computers are designed. It's an IRS regulation.

That is true. IRS Pub 936 is clear on the point.

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.

 

[athena53]

That is true. IRS Pub 936 is clear on the point.

Thanks! Glad I never tried it. Please don't tell my brother, the hotshot tax partner at a large CPA firm that I'm, pontificating on this subject. ;-)

 

[aaronc879]

That depends on the penalty, if any, for waiting. We have a county & city tax bill. The penalty for waiting on the county bill is small & so we do. The penalty for waiting on the city bill is larger than our tax rate & so we don't.

I get the bill around Dec 15th and can pay any time from then thru Jan 31st.

 

[MissMolly]

I do not know if the 1098 reflects what is paid by the date received, or if it is what accrued based on the amortization tables. If you paid all of the next year, would the 1098 reflect that? Probably not.

It's a great question.

The 1098 reflects what is paid when it is posted by the mortgage company provided it is permissible to be reported. If you paid all of 2017 payments in 2016, the only payment for which interest would be reported to you would be the interest included in Jan 2017 payment. All the other unreported interest would go in a "bucket" and be reported to you in the year you are entitled to claim it on your return.

 

[Sunset]

I double up all the time... take itemized every two years and the standard deduction in between.... .....

Same here, I don't know if a person needs permission or not, but here Cook County will send you the pre-payment bill so you can pay early for next year. That convinced me that it's a real thing, and it works !!

When we itemize, we also donate stuff, the next year donating doesn't count as we take the standard deduction.

 

[Texas Proud]

Same here, I don't know if a person needs permission or not, but here Cook County will send you the pre-payment bill so you can pay early for next year. That convinced me that it's a real thing, and it works !!

When we itemize, we also donate stuff, the next year donating doesn't count as we take the standard deduction.

Hmmm.... Are you paying tax for the next year 'early'? I would not think that would be deductible..... just like prepaid interest....

For me, our property taxes are not due until Jan 31st for the PRIOR year.... so one year I pay the previous years taxes in Jan and then the current years taxes in Dec.... all taxes are for years that have happened.... no prepaying....

 

[scrabbler1]

Take note that how you make a tax-deductible payment can affect when you can deduct it. Last December, I decided to make a 4th quarter 2015 state estimated income tax payment so I could deduct it on my 2015 federal return. [I used the 4th quarter payment as a way of bunching deductions because I had a choice to make it in December or January.] I also decided to make the payment on line instead of via paper check. However, if I made the payment on line, even in December, they would not take the money from my checking account until its due date in mid-January. That would mean I could not deduct it on my 2015 return, according to IRS rules. (P.S. I took the deduction in 2015 anyway.)

 

[Senator]

If you read the rules regarding reporting 1098 mortgage interest you will find that only interest which accrues prior to Dec 31 and is paid before Dec 31 can be deducted. Therefore, the payment due February, even if paid in Dec, is not deductible since it does not accrue until January. This has nothing to do with how the banks computers are designed. It's an IRS regulation.

FWIW, I received my two 1098s from B of A today. They have already figured, and correctly so, that any interest for 2016 has already been paid.

I paid a lot more MN State income taxes last year as a way of increasing my itemized deductions. As it turned out, I actually did not really pay that much extra as my income was higher than expected.

There is no limit on the amount you can send to the State for estimated taxes to get a deduction. Then, just get it back the next year.

 

[scrabbler1]

FWIW, I received my two 1098s from B of A today. They have already figured, and correctly so, that any interest for 2016 has already been paid.

I paid a lot more MN State income taxes last year as a way of increasing my itemized deductions. As it turned out, I actually did not really pay that much extra as my income was higher than expected.

There is no limit on the amount you can send to the State for estimated taxes to get a deduction. Then, just get it back the next year.

Keep in mind that if overpay your estimated state income taxes and end up getting a state income tax refund, you have to declare that (at least some of it) as income on the following year's federal income tax form. And that counts as ordinary income which can affect other tax items which depend on AGI such as medical expenses and ACA subsidies.