[net.taxes] tax deduction of prepaid mortgag

john@hp-pcd.UUCP (john) (08/25/85)

<<<
<
<
<	"Interest paid in advance. If you pay interest in advance for a period
<	that goes beyond the end of the tax year, you must spread the interest
<	over the tax years to which it applies. You may deduct in each year
<	only the interest for that year."
<
< Together these would seem to imply that the interest payment for
< January of the following year must be allocated to the following year's
< deductions. The rationale being that the Congress does not wish individuals
< to manipulate their tax liability at random. 
<
It's not really interest paid in advance. The interest paid on 1 Jan is for
the outstandand principle from 1 Dec through 31 Dec so it is truely interest
for the previous year. If you make TWO payments on 31 Dec then one of them
can be deducted and the other has to wait until the next year.

John Eaton
!hplabs!hp-pcd!john

mls@harpo.UUCP (08/26/85)

I have routinely paid the January mortgage payment in December.  The
bank sends me a yearly statement showing that the interest was paid
in December.

pumphrey@ttidcb.UUCP (Larry Pumphrey) (08/27/85)

The whole crux of when tax bills and payments are deductible is whether one
pays ones taxes according to the cash or the accrual system.  Probably 99%
of us pay by the cash system which means that any tax deduction is only
deductible in the year in which it was PAID.  The accrual system (and this
is acceptible by the IRS) allows one to claim a deduction in the year in
which it was DUE regardless of when it was paid.  There are some caveats
with the accrual system, but this is the general idea.  Incidentally, one
cannot bounce back and forth between the two methods on a year to year
basis.  One must select one of the methods and stick with it.  It requires
permission of the IRS to change between these 2 accounting systems.

In some years I prepay some of my deductible bills in December (property
taxes, monthly medical bills such as orthodontia, extra mortgage interest,
etc.) just for the purposes of controlling the amount of my tax liability
in a particular year.  Similarly, I sometimes let some deductible bills
go delinquent until January if the delinquency penalties can be offset by
anticipated tax savings.
						-Larry

clif@intelca.UUCP (Clif Purkiser) (08/30/85)

> 
> The whole crux of when tax bills and payments are deductible is whether one
> pays ones taxes according to the cash or the accrual system.  Probably 99%
> of us pay by the cash system which means that any tax deduction is only
> deductible in the year in which it was PAID.  The accrual system (and this
> is acceptible by the IRS) allows one to claim a deduction in the year in
> which it was DUE regardless of when it was paid.  There are some caveats
> with the accrual system, but this is the general idea.  Incidentally, one
> cannot bounce back and forth between the two methods on a year to year
> basis.  One must select one of the methods and stick with it.  It requires
> permission of the IRS to change between these 2 accounting systems.

	There are some real advantages with using an accrual accounting 
system  the primary advantage is the ability to deduct the interest on a 
mortage with negative amoritization.   Most Adjustable Rate Mortgages (ARM) and some fixed mortgages (GPMs) allow negative amoritization (i.e. at the end of 
the year the loan balance is larger than the start of the year) .  
Unfortunately, the IRS takes a dim few of people who use a cash system deducting this additional interest because they didn't pay it in the year that it was
accured.  However if you are on an accrual accounting system you are allowed 
to deduct all of the interest the banks charged for you loan. 

	Accrual accounting also solves the problem about when you can deduct 
Dec interest, you always deduct in the year it was accrued.  The only 
disadvantage with an accrual system is you cann't play games at the end of the 
year to try to minimize your tax bill. I always make it a practice to take as many
deductions as possible as soon as possible, the less time Uncle Sam has my money
the better.



(Almost all business use it 
-- 
Clif Purkiser, Intel, Santa Clara, Ca.
HIGH PERFORMANCE MICROPROCESSORS
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