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January house payment in December gets you an extra mortgage interest deduction

As I was putting together the latest weekly tax tip (you do look at those over there at the top right of the ol' blog's home page, don't you, or at the consolidated weekly tax tips page?), I realized I had never specifically blogged the tax-saving advantage of making your January mortgage in December.

So pardon the duplication, but it's an easy tax move worth the extra attention.

Here's the deal.

When you pay your January mortgage in December, that payment's mortgage interest can be deducted on your Schedule A when you file your tax return next year.

Wait, some of you are asking, isn't that prepaid interest, which in most cases (certain loan points are an exception) cannot be deducted in full in the tax year in which it's paid?

No worries. House payments are made at the end of your occupancy period. That means the payment on each 1st of a month covers the previous 30 or so days you just spent in your home.

This is the opposite of rent, where the landlord wants that money at the beginning of the month to cover you staying in his or her place for the upcoming month.

So the interest in your Jan. 1 mortgage payment includes interest for December's loan period. That makes it eligible to be deducted for this tax year.

If you plan to take advantage of this extra interest deduction, do so as soon as possible. By paying early, your loan company will be able to get it on the books in plenty of time to be reflected on your annual Form 1098 that shows your house payment tax details.

Form alert: Don't worry if your 1098 looks different than the official IRS form. Most lending institutions don't use the IRS document. Instead, they produce "substitute" 1098 statements that include all the info on the IRS form, just in a format that fits the lender's overall paperwork system.

If you just can't swing the early mortgage payment until closer to Dec. 31, that's fine. It is, after all, holiday gift-buying time.

As long as you get it en route to your loan company by the end of the month, you can go ahead and deduct the extra interest on your 2010 tax return.

But in this case, include a statement letting the IRS know why your amount differs from your banker's annual 1098 tally, since the tax agency gets a copy of that document, too.

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