Prepaying Your Mortgage Interest

If you, like most individuals, are a cash-method taxpayer, you ordinarily deduct interest in the year that you pay it. However, if you prepay your mortgage interest, you can't fully deduct the prepaid amount in the year you pay it. Instead, the general rule is that you must deduct the interest in the year to which it applies.

An apparent exception to this rule applies if you make your first payment of the next tax year during the last month of the preceding year (for example, you make your January 1^st mortgage payment sometime in December). Mortgage interest is due after the month to which it applies; therefore, your January 1^st payment is for interest you owe for the month of December and can be deducted in the earlier year.

Work Smart Be aware that if you use this strategy to reduce your taxes, the mortgage interest statement you receive from your lender may not reflect that last pre-January 1st payment. If not, you should deduct the correct amount on your tax return and attach a short statement explaining why the lender's statement is incorrect.

Detailed rules apply to:

• interest paid at the settlement on a home loan
• points