The cost of owning a home includes more than the mortgage payments. These additional fees include property taxes and homeowner's insurance. Homeowners can get a tax break by claiming the property taxes they paid during the tax year, weather it was via an escrow account or directly to the tax collector. You also may be able to claim mortgage insurance premiums. Other fees paid into your escrow account are generally not eligible to be claimed on your tax return.
Escrow accounts are used to save money for bills such as property taxes, homeowner's insurance, mortgage insurance and other hazard insurances. Each month, you make an additional payment on top of the regular mortgage payment to your lender. The overage is then placed in your escrow account, which is managed by a third party. When the taxes or insurance payments are due, the bills are paid on your behalf with the funds in the escrow accounts. It is in the lender's best interest to always ensure that all property taxes and other miscellaneous charges are paid on time so that a lien cannot be placed on the property as the result of non-payment. Therefore, some lenders will require you to maintain an escrow account, especially if you obtained the mortgage with less than a 20 percent down payment.
The lender calculates the escrow payments based on what the estimated property taxes are and what the premiums for your insurances are. Then, it divides the yearly amounts by 12 to come up with the monthly payment. For example, if your property taxes are estimated to be $3,600 for the year and your homeowner's insurance premium is $1,200, your escrow payment each month would equal $400. Often, lenders like to have a little extra on reserve in the event that taxes or premiums rise unexpectedly. However, they can only keep up to two months additional in the account. Over time, your escrow payments will probably rise. This is because property taxes are likely to increase as well as your insurance premiums.
Property taxes are considered deductible in the eyes of the IRS, as long as the property tax is calculated by using the assessed value of the property and in the same fashion as the other properties within the taxing zone. Any money paid toward property taxes in a year can be claimed. This is valid for taxes paid via escrow accounts as well. Your mortgage company should provide you with a statement showing the amount paid directly to the tax collector. Note, that this amount will likely be less than the amount you actually paid into your escrow account over the year. Claim this on the 1040 Form using Schedule A. Additionally, the interest paid on your mortgage and any mortgage insurance premiums can be claimed.
Sometimes, portions of property taxes are used to fund projects that are considered to increase the value of your property. An example of this would include new sidewalks in your community. Situations like this are nondeductible. Adjustments might need to be made on the amount you claim if this applies to you. Your tax preparer will be able to consult you with this topic. Homeowner's or other hazard insurance premiums paid using the escrow are also nondeductible and cannot be claimed.
- Internal Revenue Service: Topic 503 - Deductible Taxes
- Real Estate ABC: Owning a Home -- What’s Deductible?
- Internal Revenue Service: Publication 530 - Main Content
- Bankrate.com: Escrow Accounts Protect the Lender Against . . . You
- Bankrate.com: Escrow Makes Payments -- Even on Fixed-Rate Mortgages -- Variable
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- What Is an Escrow Overpayment?
- What Happens if You Get an Escrow Check That Is Too Much?
- Federal Laws on an Unexpected Tax Escrow
- What Is an Escrow Refund?
- What Can I Do if My Mortgage Company Came Up Short on the Escrow?
- What Does an Excess of Surplus Funds Mean in Escrow Accounts?