I would like to pay off our mortage but...?

You might have received misinformation from a new person at the bank. Talk to an experienced employee. If your paying back your mortgage with legitimate money (money you all ready got taxed on) the IRS should not give a hoot. They may report the payment as part of their AML obligations (Anti Money Laundering). By law financial institutions are suppose to question the source when clients walk in with that much cash. They don't care if it comes from your regular savings or investment account. They aren't suppose to tell you this either to make you suspicious.

If you have a locked in mortgage there may be a penalty for paying it up front. Typically this goes down over the life of the mortgage. Banks charge these fees to recover the future revenue they would loose, that $500 a month you mentioned.

On another note, if your bank is under capitalized like many others they would be glad to close the mortgage so they don't have to hold capital against possible default.

your banker is on crack as most bankers are. There are no taxes owed to anyone for paying of a debt, never has been and there cannot be as paying debt is not income to you.

Sadly what the bank can do and it is up to them is to tag your paying the loan off a suspicious financial transaction. What that means is 100% of your money gets escrowed into a separate account until the Treasury Department gives the bank clearance. This can take 1-6 months. It falls under the patriot act. and you need to make payments while being processed or ruin your credit and default on the loan.

If the money is already in the same bank they have no justification for doing this as they already "know" the source of the funds. If the money is not in their bank then it gets tricky. A direct wire from where it is to your bank is best as any wire over 20K is reported to the treasury anyways

good luck and I would leave that bank ASAP

Paying off your mortgage is NOT a taxable event. Either you misunderstood the bank person or the bank person is an idiot -- I have seen some REALLY bad financial info attributed to bank employees.

If you walked into the bank with $65K in cash, the bank would have to report that cash transaction to the IRS. But this is the anti-terrorist/money laundering thing and would not require you to pay taxes on those funds.

I'd discuss it with the bank, and clarify exactly what they are talking about.

You pay taxes on income. If you send the bank a check for $65,000; that is not income to you, so you wouldn't pay any taxes on that.

Now, you would lose the deduction for the interest you are paying on your mortgage, but you are much better off financially paying off the mortgage, and losing that tax deduction.

Sounds like complete BS to me except for one thing. Where are you getting the money from? If it is money that cannot be traced, the bank has to report the transaction under the anti money laundering laws. Assuming that the money is legitimate, you have nothing to worry about. But I would get the bank to explain exactly what they mean.