Should You Prepay Your Mortgage?

Tax Report

MortgageIf you are looking for a long-term strategy for saving money, consider making extra principal payments toward your mortgage. Those payments can substantially reduce the amount of interest you pay and shave years off the term of your loan.

How It Works

As you know, when you take out a mortgage loan, you are agreeing to pay back the borrowed principal at a certain interest rate over a fixed number of years. Each monthly payment is allocated to principal and interest, and, as time goes on, the proportion allocated to interest decreases as the overall loan balance is paid down.

By making extra principal payments, you reduce the principal earlier and will reduce the total interest you pay. A simple way to make extra payments is to divide your monthly principal and interest payment by 12 and add that amount to each monthly payment.

Tax Effects

A potential disadvantage of prepaying principal is a reduction of the itemized deduction generally allowable for payments of home mortgage interest. For example, if you are in the 28% tax bracket, every $1 of mortgage interest paid is potentially 28t in tax savings. On the other hand, each $1 of interest eliminated is $1 saved.

First Things First

Check with your lender to make sure prepayment penalties don't apply. Also, instruct the lender to apply the extra amount of each payment directly to your principal.

2016 Retirement Plan Limits

The IRS made very few cost-of-living adjustments to the contribution limits that apply to various retirement plans for the 2016 tax year. Following are some of the key limits.

Defined contribution plans. The dollar limit on salary deferrals to a 401(k), 403(b), or governmental 457 plan remains unchanged at $18,000. The limit for additional catch-up contributions (available to participants age 50 and older if their plan allows) also remains unchanged at $6,000.

The annual additions limit which applies to the combined contributions of the employer and employee to a defined contribution plan remains unchanged at $53,000. (Catch-up contributions do not count toward the limit.)

SIMPLE IRAs. The limits on employee contributions and catch-up contributions remain at $12,500 and $3,000, respectively.

Individual retirement accounts (IRAs). The limits for contributions and catch-up contributions to traditional and Roth IRAs remain unchanged at $5,500 and $1,000, respectively.

Individuals who contribute to traditional IRAs and have access to a workplace retirement plan (whether their own or through their spouse's plan) will see minor changes in the income-level phaseout ranges that apply for purposes of making deductible contributions. The ranges, which are based on modified adjusted gross income (MAGI), are:

  • $61,000 to $71,000 for single taxpayers and heads of household covered by a retirement plan at work (unchanged from 2015)
  • $98,000 to $118,000 for married couples filing jointly when the spouse contributing to the IRA is also covered by a workplace retirement plan (unchanged from 2015)
  • $184,000 to $194,000 for married couples filing jointly when the spouse contributing to the IRA is riot the spouse with the workplace retirement plan (up from $183,000 to $193,000 in 2015)

The income-level phaseout ranges for Roth IRA contributions are $184,000 to $194,000 (married filing jointly) and $117,000 to $132,000 (single and head of household).

The general information in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.

Short Takes

Increase in De Minimis Limit

Businesses making the de minimis safe harbor election to expense certain purchases of equipment and other tangible property in the year of acquisition should be aware that the IRS recently announced an increase in the expensing threshold for taxpayers who don't have "applicable financial statements." For these taxpayers, the limit is raised from $500 to $2,500 per invoice (or per item as substantiated by the invoice). For taxpayers with applicable financial statements, the limit remains $5,000 per invoice or per item.


Estate-tax Filings Increased in 2014

According to the IRS, the number of estates filing a federal estate-tax return increased 12.9% from 2013 to 2014. However, only 43.2% of those estates were taxable. One reason to file a federal return for a nontaxable estate is to preserve the unused exclusion amount for the surviving spouse.


Law Eliminates Social Security Claiming Strategies

Two popular claiming strategies for Social Security benefits - known as "file and suspend" and "restricted application" - were eliminated by the Bipartisan Budget Act of 2015. These strategies had been used by some married couples to maximize their benefits. While some older individuals may be grandfathered under the new rules, others may want to consider additional strategies still available.

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