R.E.Tax Refund in following year

[Bird Legs]

Client paid the 2005 real estate taxes on his home in Nov. 2005.
During 2005, client turned 65 which lowered the taxes for part of the year.
In April, 2006, client received a refund for the excess tax payment for 2005.
The 2005 income tax return has not been filed yet. Am working on it.
Question: should this refund be used to reduce the R. E. taxes deducted
on the 2005 return? Or should it reduce the R. E. Taxes for the 2006 return?
Or neither and be picked up as income on the 2006 return?
Have not had this situation before.
Thanks for any help.

[solomon]

No Income

Do not declare income but reduce taxes. Personally, I would do it in the year in which he received the money.

[Bill Tubbs]

2 options

For argument's sake let's say taxes pd in Nov 2005 were $1000, and the April 2006 refund was $200...

Method 1: deduct full $1000 in 2005. Then report $200 in 2006 as Other Income (Form 1040, Line 21) -- see "Recoveries".

Method 2: deduct $800 in 2005 and do nothing in 2006. Premise here is that if you didn't deduct the $200 that ended up being refunded to you, there is no recovery of that amount. Just like with medical -- if you paid a bill in 2005 but expect insurance to reimburse you in 2006, then you don't deduct that amount. Of course though, the danger with this route is that in 2006 you forget (or a different preparer isn't aware) you netted the two amounts, see client got $200 refund, deducted > $200, and therefore treat the $200 as recovery.

Bill

[Unregistered]

Reporting a RE tax refund

The only problem with netting in 2005 as your post suggests - the tp will probably get a 1099 for 2006 showing the refund of overpaid property taxes and the IRS will be looking for that amount on the 2006 return.

I would report everything as a cash basis taxpayer should do - deductions in the year that they were paid (2005) and report the refund on the miscellaneous income line - "itemized deduction recovery" in 2006

[Armando Beaujolais]

TheTaxBook

Look in TTB on page 4-10.

"If a refund is received in 2005 for real estate taxes paid in 2005, reduce the deduction on Schedule A by the amount of the refund. If the refund is for taxes paid in anearlier year, do not reduce the deduction on Schedule A. Instead, include the refund or rebate in income on line 21, Form 1040, but only to th extent a tax benefit was received for deducting the taxes in the earlier year."