Prepaying Your Mortgage



In this time of low interest rates, does it make sense to prepay your mortgage? The earlier you pay off your mortgage, the more interest you may save. Even if your mortgage rate is relatively low, it may be difficult to find a conservative investment that would pay you a higher rate. Unless you expect to earn substantially more by investing your money elsewhere, prepaying could make sense. However, there are some additional factors to consider.

Other debts. If you have credit card debt, auto loans, or other debts that have a higher interest rate than your mortgage, paying those off should be a priority, especially since the interest on consumer debts is generally not tax deductible.

Goals. Before you prepay, consider whether you'll need that money in the future for college expenses or other financial goals. If you prepay your mortgage and later decide to borrow against your home equity, rates may have risen, making your new loan more costly than the one you prepaid.

Taxes. If you itemize your deductions, prepaying means your home mortgage interest deduction would be reduced or eliminated. The tax impact of having less deductible interest won't be as severe if you are a high earner subject to the newly reinstated overall limitation on itemized deductions. We can help you project the tax cost of losing all or part of your mortgage interest deduction.

Employment Taxes: A Cautionary Tale

Small business owners wear many different hats. One of them (probably not a favorite) is that of tax collector for the IRS. Employers are required to withhold federal income and FICA taxes from their employees' paychecks. These withheld taxes are considered to be held "in trust" as soon as they are collected and must be deposited with the federal government on a strict schedule.

Penalty for Nonpayment

If the taxes aren't paid, the IRS may pursue the company and any "responsible person" (i.e., individuals with the power to collect, account for, and pay over the trust fund taxes) who willfully fails to collect and/or remit the taxes. In a recent Tax Court decision, a company's chief operating officer-secretary was held personally liable for failing to remit employment taxes.



Deemed To Be Responsible

The executive claimed she was not a responsible person because she didn't control the company's finances. She made the point that lower level managers used a facsimile of her signature to sign most checks. But the court noted that she did, in fact, sign some checks and that she knew the withheld taxes were being used for other corporate purposes. The executive also claimed that she had made a reasonable effort to pay the overdue taxes. As proof, she pointed to her support of two different proposed mergers, either of which might have led to improved financial stability and allowed the merged company to meet the company's tax obligations. But the Tax Court rejected the argument. It pointed out that she had the authority to pay the company's delinquent taxes but used the money to pay other creditors instead.

The general information in this publication is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purpose of avoiding tax penalties.

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