Using a form provided by the government may sound simple enough, but make sure you’re giving Uncle Sam the right numbers.
Escrow, from the French word escroue (or “roll of writings”), is required by many mortgage lenders. When you pay your mortgage under escrow, that means you pay an additional amount on top of your loan repayment each month. Those extra funds are to be placed in an escrow account, which your lender saves to pay property taxes, homeowners insurance, or homeowners’ association fees.
Lenders under an escrow account are responsible for making property-tax and other payments to the proper entities, such as a county tax assessor’s office, on your behalf. Escrow accounts are required especially if you bought your Austin, TX home with less than a 20% down payment. This ensures the mortgage company that all your real estate taxes and other fees will be paid on time. (The company, of course, also has an interest in your property until the loan is paid in full.)
At the end of a year, lenders adjust your monthly escrow amount based on your actual tax and insurance bills. If your escrow account left you short — meaning there wasn’t enough to cover all your bills — you usually can spread the difference over the next year. If you paid too much in escrow, the lender should give you a refund (which can be a nice surprise!).
When deducting escrow from your taxes, there are caveats to consider. Keep in mind that only the actual property taxes you paid from the escrow account can be deducted. When your escrow account was established by your lender, you most likely paid an amount that was either higher or lower than what your property taxes actually would be. The amount you deduct on your taxes must match your actual property-tax bill — therefore, you cannot simply deduct your full escrow amount. The amount you are allowed to deduct should be located in box four of the 1098 Mortgage Interest Statement given to you by your lender. If you didn’t get the mortgage interest statement, contact the county or other agency that collects your property tax to find out exactly how much you paid in a calendar year.
Also be careful to match up your tax bill with the correct year you’re filing taxes for. The tax deduction is only for the property taxes you paid in that tax year. Some taxing authorities are a year behind, so it’s possible you paid your 2015 taxes in 2016. Or you could have prepaid your 2017 property taxes in 2016. Whatever the situation, it’s important to check and double-check that you’re making the correct property-tax deduction.