Property Tax deductions when there is an overpayment and refund the following calendar year
January 5, 2012 11:39 AM   Subscribe

My mortgage company overpaid my property taxes and is aware of the overpayment. On my 2011 income taxes, do I deduct the actual amount due, or the amount paid?

I purchased a house this year and closed in May. Property taxes in my area are assessed by the county, and the tax year runs from July 1st to June 30th. Property tax payments are due twice a year, on September 30th and December 31st. My property taxes are paid by the mortgage company, from an escrow account.

During the process of buying the house, I became aware that the property was over-assessed. I filled out a form at closing appealing the assessment for tax year 2012 (July 1, 2011 to June 30, 2012). The mortgage company was aware of the appeal and I kept them informed and sent them relevant documentation during every step of the appeal process (I presented my case at two separate hearings). I won the appeal and had the assessment reduced, but this happened after the first installment of 2012 property taxes had already been paid. As a result of the appeal, I received a revised second installment bill from the county, showing the new, lower amount due. I forwarded this bill to the mortgage company.

In spite of the fact that I sent the revised bill, and received confirmation that it had been processed by the mortgage company's tax office, the mortgage company still paid the original (higher) amount for the second installment of property taxes. The county website shows receipt of the second payment on December 24th, and that 2012 property taxes are "paid in full," but it shows that only the revised (lower) amount due was paid (there is no proof of the overpayment, but, I have a printout of this website showing the taxes as paid in full).

I called the mortgage company, and the customer service person I spoke to conferenced in the county tax collector's office. The county tax collector stated that they would refund the overpayment to the mortgage company. The mortgage company customer service agent then said they would write a check to me directly for the amount of the overpayment as soon as they received the refund from the county. (I have no written proof that this will actually occur, as this was all stated in a telephone call. I do have written proof that the mortgage company overpaid the taxes in the form of a printout of "tax and insurance payments" from the mortgage company's website.)

Since I will (presumably) be receiving the refund in calendar year 2012 for taxes overpaid in calendar year 2011, how does this work in terms of deducting property taxes from my 2011 income taxes? Do I report the amount of taxes actually paid, or the amount of taxes that should have been paid? How does that carry over for 2012 income taxes, and property taxes to be paid in 2012?

I have owned a house before (sold in 2009 due to a move to another state), but with that house, I paid my property taxes myself directly (outside of the mortgage). Therefore, I kept track of the amounts paid myself for income tax deduction purposes. The town (in that case) had the same July 1 - June 30 tax year, with taxes due in four installments (8/1, 11/1, 2/1, and 5/1). For income tax purposes I reported the property taxes I paid during the calendar year regardless of the tax year -- so, for example, for 2006 income taxes I reported the last two payments on 2006 property taxes (due 2/1/06 and 5/1/06) plus the first two on 2007 property taxes (due 8/1/06 and 11/1/06). I don't remember if there is a space for property taxes paid from escrow on the 1098 form (I have yet to receive it, but it is still early January) -- which would answer my question as to what amount is reported.

My house was reassessed again for tax years 2013-2015 (the county is on a 3 year reassessment cycle), and my assessment was even further reduced. When will my monthly mortgage payments be readjusted? If they are readjusted in May (as I suspect), they will not reflect the second drop in the assessment, as I will not receive another property tax bill until July.

posted by tckma to Work & Money (8 answers total) 1 user marked this as a favorite
Best answer: You will absolutely receive the amount you over paid. Deduct the actual property tax bill. The fact that the refund will come in 2012 doesn't mean you get to deduct the higher amount.

You can call your bank to see about an adjustment in your tax escrow. With the actual bill in hand they should be amendable to adjusting it. If not any excess escrow over the padding they are allowed to hold on to will be refunded to you.
posted by 2manyusernames at 12:09 PM on January 5, 2012

The IRS agrees with 2manyusernames. Specifically, they say:
"If a portion of your monthly mortgage payment goes into an escrow account, and periodically the lender pays your real estate taxes out of the account to the local government, do not deduct the amount paid into the escrow account. Only deduct the amount actually paid out of the escrow account during the year to the taxing authority."
posted by Mr.Know-it-some at 12:54 PM on January 5, 2012

I believe the mortgage tax form is a 1098, which you should get from your bank, which will be the actual amount paid, not the higher (or lower) amount you paid into escrow.

You should use the tax form to enter your amounts. So, agreeing with the two above answers, but adding that you should be using your tax forms (1040, 1098, 1099, etc) to find the numbers you need to report.
posted by rich at 1:12 PM on January 5, 2012

(sorry - in your case, check you first 1098 to make sure it's right, as you may get a second 1098 "adjusted" reporting form with the new amount after the county does their refund)

As for the reassessment, being assessed lower won't necessarily reduce your tax, but usually would. Banks typically adjust escrow quarterly, so that adjustment won't come until after the following quarter when they get the new information on what is owed, tax-wise.
posted by rich at 1:15 PM on January 5, 2012 [1 favorite]

Best answer: IANYTA (I am not your tax accountant).

It's actually pretty simple - you will receive a 1098 statement from your mortgage processor by the end of February. Declare your taxes paid deduction according to that statement. You will also receive a 1099-G from any government entity that paid money to you. Declare as income whatever is on those forms. It sounds like the refund was (will be?) made in 2012. If that is the case, you'll get a 1099-G from your city/town next year for the refund amount and should declare the refund on your 2012 return. If the town did manage to refund your money by December 31 2011, and your mortgage processor has already sent out 1098s, then, as rich says, you should wait for an amended 1098 from the processor.

However, it's a bit strange that your town/city would send the refund to the mortgage processor rather than you. It doesn't have to be done that way. It's your money, not theirs. Having the town send it the mortgage processor just means you'll wait longer to get that money back. You should contact the tax collector's office directly and ask them to send the refund to you if it's not too late.
posted by dchase at 1:24 PM on January 5, 2012

Response by poster: @dchase, I called the county tax collector's office myself this time and they were absolutely insistent that they will only refund the overpayment to the entity that originally paid the tax. (They do agree that there was an overpayment, though, so that's good, at least.) It turns out this wasn't even my mortgage company, but some company called Core Logic that I've never even heard of.

This is the same county tax collector's office that refuses to send property tax bills to the mortgage company, insisting they will only send them to the property owner, whose responsibility it is to forward it to the mortgage company.

As you say, it is my money, and I'm not sure why so many different hands need to touch it on its way back to me.
posted by tckma at 2:14 PM on January 5, 2012

Response by poster: An update: The mortgage company now sent me a bill for around $450, claiming I have an "escrow shortage" due to some minimum balance requirement that they seem to have pulled out of someone's rear orifice. I can't afford that kind of a lump sum this month, so as "punishment" for their error, my monthly payment goes up $50, because of THEIR mistake.

What chaffs me is the statement "your escrow account must have a minimum balance of $X,XXX at some point during the year." If I interpret that statement literally, it did meet that minimum balance requirement from the day of my closing up until the overpaid second property tax installment. So that, to me, means that I shouldn't have received a bill or an increase in monthly payment.

I'm really annoyed. The county claims to have mailed a check for the property tax refund on January 6. Of course, the mortgage company claims not to have received it.

I've just sent my information to my tax accountant to do my 2011 income taxes. We'll see what happens.
posted by tckma at 1:20 PM on February 13, 2012

Response by poster: I called the mortgage company today and they confirm that they received the refund on February 9th, at which point they deposited it into the escrow account. The escrow analysis resulting in the bill I received was done on January 25th.

Unfortunately, the new payment stands. I can ask them to do another escrow analysis whenever I want, but they only will change the payment if it "benefits you by more than $50 per month." The amount of my property tax refund divided by 12 is not even $20.

On the other hand, the triennial reassessment should help, so I'll ask for another escrow analysis in July when we get the 2013 property tax bill.

How this affects my 2011 income tax remains to be seen. My accountant has been e-mailing me almost daily with small detail questions, so this leads me to believe that they are working on it and will be done soon.

I still have no idea where they pulled this minimum balance out of. All I've gotten is a response similar to the very parental "because we said so."
posted by tckma at 2:06 PM on February 23, 2012

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