Bank’s Early Mortgage Payment Plan Can Help Taxpayers Save Some Money
Q: My mortgage statement for December included a message from the mortgage lender that said that in order to receive credit for tax purposes for interest paid in 2000, I would need to make my Jan. 1 payment by Dec. 29. Because the Jan. 1 payment includes interest through Dec. 31, it’s my view that they are not entitled to the entire December interest until December is over. Granted, we are not talking about a whole lot of money--a few days’ worth at most. But multiply that by the thousands of loans, and they are getting thousands or millions of dollars before they are earned. Is this even legal? If I date my check Dec. 31, can I claim the interest I paid for December regardless of when the bank receives it?
A: It’s not often a reader can make me feel sorry for a bank, but you just did.
Actually, your bank is offering a courtesy to folks who want to increase their 2000 deductions by making their January payment early. Because Dec. 31 falls on a Sunday this year, the bank is simply asking that the payments be made by the last business day of the year so the interest can be reported on the 1098 tax forms it sends to taxpayers and to the IRS. Some banks require that payments be received even earlier if they are to be included on year 2000 forms.
There is no requirement that you pay early, but it often makes a lot of sense to do so. If you itemize your deductions and your income will be about the same next year as this year, you often can benefit from making your January mortgage payment in December. Other strategies to increase 2000 deductions include paying the half of your property tax bill due in April by Dec. 31, and prepaying any state taxes that will come due early next year.
Does the bank make a little money by recognizing interest payments early? Sure, just as you can save a little money in taxes by paying early. Not only is it legal, it’s a pretty good deal.
If you claim an amount of mortgage interest different from what the bank says you paid, you’re increasing your chances of an IRS audit because the tax agency can easily match your numbers with the bank’s. Only you can decide whether making a stand on this issue is worth the hassle.
Stubborn Uncle Needs Expert Aid
Q: I have an uncle who lives in Rhode Island. He is very pigheaded and thinks he can write his own will and set up his own trust. He has $3 million to $5 million in his estate and is 80 years old; his wife is 67. Can you help me advise him?
A: You do the porcine species a disservice. Pigs are pretty smart, which is more than you can say for an amateur who would try to do his own estate planning. Someone with an estate that large needs an expert. The best thing you can do for him is to help him find a qualified attorney who specializes in estate planning. The Rhode Island Bar Assn. should be able to give you some referrals.
Family Money Talks Beneficial
Q: Thank you so much for your answer to the person who was asking for “tactful” ways to suggest a parent reduce the size of a taxable estate by giving away money before death. My sisters and I learned the hard way that it is best to stay out of your parents’ business. I am afraid we have lost the trust and the companionship of our father and stepmother because of our concern for our futures. I hope others can learn from our mistake and just respect the wishes of others, even though they may not agree with them.
A: It’s sad that there’s a rift in your family. But it takes at least two sides to have a fight, and one has to wonder about a father who would cut off contact with his children over this issue--especially since you, at least, feel contrite about the whole thing. There are, indeed, greedy adult children who need to understand that their parents’ money belongs to their parents. But there are also parents who are unnecessarily paranoid about money issues and who view any interest by their children in estate matters as evidence of greed.
That can make it extraordinarily difficult for families to have vitally important discussions about health and money matters, such as whether the parents have planned for long-term care, how it will be paid for and who would handle financial issues should the parents become incapacitated.
Adult children often need to know at least that much about their parents’ situation, because the younger generation could wind up as caretakers for the elder.
In addition, some older people are unaware that steps can be taken before death to reduce probate costs and potential estate taxes. Although an adult child shouldn’t demand that a parent give away money to reduce the size of an estate, he or she could help the parent get in touch with tax and estate planning professionals who can recommend specific strategies--if the parent is willing and interested.
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past columns, visit The Times’ Web site at https://www.latimes.com/moneytalk.
