# Maximize Your Homeowner Tax Deductions

Update: the following tips may or may not be applicable for your county and state, depending on the process of property tax payments. Also, the general landscape of deductions have certainly changed since the original writing of this article, so be sure to check the latest regulations.

Paying taxes is never a fun thing, but if you happen to be a homeowner, you are privy to a nice deduction for any property taxes  or mortgage interest paid for the calendar tax year.

### Property Tax Deductions

It turns out that property taxes are something you should look forward to paying off as soon as you get the bill, and the reason is a bit subtle.

Since most property taxes are split into two installments, homeowners are given the option of paying the part one of the taxes sometime around November, and part two sometime around February. Since the property tax deduction lets you deduct the full amount of property taxes paid in the calendar year, paying the second installment of your property tax bill in the current calendar year actually nets you an immediate return on the installment amount equivalent to your effective tax rate.

Let’s go through an example. Suppose your home has an assessed value of \$1 million in 2017. A simple property tax rate of 1% would equate to a 2017 property tax bill of \$10,000, split into two installments of \$5,000. Let’s also assume an effective tax rate of 30%. When you get your property tax bill in November 2017, you have two options: (A) pay both installments at a total of \$10,000 on November 1st, (B) split the payments into two installments on November 1, 2017 and February 1, 2018.

Let’s assume that the assessed value of your home, your effective tax rate, and the prevailing interest rate and market conditions remain the same, and only consider the property tax bill for 2017. How much money would end up in your pocket in each of the scenarios?

With option A, you pay off your entire property tax bill on November 1, 2017 for \$10,000. Come April 15, 2018, you’ll be able to deduct the full amount and effectively end up with 30% * \$10,000 = \$3,000 in your pocket. If you leave that amount in a bank account paying 1% interest, you’ll end up with \$3,030 on April 15, 2019.

With option B, you pay the first installment of your property tax bill on November 1, 2017 for \$5,000, and you leave the balance in your bank account. On February 1, 2018, you’ll pay the second installment. For the three months that elapsed between your first and second installments, you’ll earn \$12.50 in interest on the \$5,000 you earmarked for the second installment. Come April 15, 2018, you’ll deduct the first installment and end up with 30% * \$5,000 = \$1,500 in your pocket. If you leave everything in the bank account, on April 15, 2019 you’ll end up with an extra \$0.15 from the \$12.50, and \$15 in interest earned from the deduction amount itself. You’ll also be able to deduct the second installment for another \$1,500. In total, you’ll end up with \$12.50 + \$0.15 + \$15 + \$1500 + \$1500 = \$3,027.65 on April 15, 2019.

The difference between option A and option B is a meager \$2.35, which may seem too trivial to be of concern. But as personal finance aficionado, we love to squeeze every bit of min/max opportunity available at hand! However, the picture may become clearer if we disregard returns you may reap on cash on hand, and simple look at the amount of deductions you may get for two payment options:

Option A’, you pay the first installment of your property tax bill on November 1, 2017 and the second installment on December 31, 2017. Come Tax Day 2018, you’ll be able to deduct the full amount of the property tax bill and pocket \$3,000.

Option B’, you pay the first installment of your property tax bill on November 1, 2017 and the second installment on January 1, 2018. Come Tax Day 2018, you’ll only be able to deduct the first installment of the property tax bill, and pocket \$1,500. You’ll then need to wait a full year for Tax Day 2019 before you can deduct the second installment.

Would you rather have \$3,000 now or \$1,500 now and \$1,500 later? The choice is pretty clear. Pay those property taxes before the end of the year!

### Mortgage Interest Deductions

Now let’s move on to mortgage interest deductions. Interest paid on mortgages are only deductible for the first \$1,000,000. In practice, the actual limit is probably \$1,100,000 for homeowners that don’t have any home equity debt. To calculate the percentage of your mortgage interest that is deductible, divide 1.1M by your outstanding principal if it happens to be over 1.1M, and that’s the percentage of deductible interest.

With real estate prices on the rise once again in many of America’s most coveted markets, many are no doubt using jumbo loans to purchase their homes. Since the Home mortgage interest deduction is one of the best tax breaks available around, you’ll want to ensure you’re getting the maximum deduction. If your principal amount is over 1.1M, consider paying down the principal quickly to get at or below the 1.1M mark.

In today’s environment of low interest rates, you can consider a lump sum payment towards your mortgage principal an investment with an automatic return rate equivalent to your mortgage rate. If you have a mortgage rate anywhere north of 3-4%, that’s already quite a deal compared to the meager rates your bank is offering to hold your cash for you. Even at the high end of the savings rates being offered by some of the online banks such as Ally or newer commercial offerings such as Goldman Sachs, you’re looking at most 1%.