Correct Property Tax Deduction?

[OtisMozzetti]

I apologize if this is an old, old question:

Client paid real estate property tax on his main home, and his statement from the county shows he owed $3775.02 which he paid by check when the tax had to be paid or else they would've added a 10% penalty.

The $3775.02 broke down as follows: County Tax 1% = $3116.29

various voter approved debt service: 0.1054% = $328.45 (city, school unified, school community college, township hospital, local transit authority, regional park, and local water district)

Fixed Charges and Special Assessments: total of $330.28, consisting of
Union Sewer Service $243.36
Mosquito Abatement $1.74
Paramedic $24.96
Flood Benefit $26.60
local trail LLD $5.44
Clean Water Fee $13.50

How much of this is an allowable Schedule A deduction and why or why not?

[solomon]

If for the General Public Welfare

http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=4ac3f5a1c66f2e70a534a92fefa9f588&rgn=div8&view=text&node=26:2.0.1.1.1.0.8.296&idno=26

[OtisMozzetti]

Thank you I read the cited article

Thank you, I read the article you cited. For real estate tax, it does not specify that the tax must be a percentage of the value of the property. It does say that the tax must be imposed for the GENERAL PUBLIC WELFARE.

So that leaves me with the question about the following items, as to WHETHER OR NOT THEY ARE FOR THE GENERAL PUBLIC WELFARE? The items are as follows: mosquito abatement $1.75, paramedic $24.96, flood benefit 5 $14.68, regional trail LLD $5.44, clean water fee $13.50.

Union Sewer Service $243.36, it is less clear to me that the fixed charge for sewer service is for the general public welfare.

[OtisMozzetti]

Read the discussion Taxes for local benefits

In reading the article which was cited, one should make sure to hit "read next", or was it "browse next", which goes on to Title 26: 1.164-4 captioned as "Taxes for local benefits".

I am asking this question because I really want to know what is the correct decision about whether or not to deduct these items for the client mentioned and for all other clients. Some clients act shocked if I say that the "Fixed Charges and Special Assessments" aren't deductible. I have a strong intuition that clients who prepare their own returns, and clients who use other tax preparers, deduct those items. I don't want to be at a competitive disadvantage, nor do I want problems for the client and for myself when the IRS may examine the returns.

In many instances, the only information that the client has anywhere near readily available consists of a statement from a mortgage company of the amount of "real estate taxes" that were paid. The "Fixed Charges and Special Assessments" aren't broken out.

[Zee]

Are you sure this isn't an assessment being paid via installments?

As I recall, sewer assessments aren't deductible. They're considered an improvement, although I'm sure you already knew that. Often, taxpayer's are given the opportunity to pay large sewer assessments over time and have it added to their property taxes. When the property is sold, they have to pay up in full. So my guess is this isn't a deductible item. Typical sewer charges are part of the utility billing, not property taxes.

[OtisMozzetti]

Thank you, Zee, I consider sewer payments cleared up

Thank you, Zee. The charges I am asking about are clearly not assessments for building a sewer, etc.; these are charges for "Union Sewer SERVICE" paid the Union Sewer District. Either way, it wouldn't be a Schedule A deduction. I am confident that the charge I have asked about is a utility service charge which cannot be added to the basis or the property. On the other hand, if there were assessments made to property owners for putting in a sewer, then we all agree that would be added to the basis of the property.

When I have explained this issue to clients in the past, it has rung true to them that one should not be able to get a Schedule A deduction for "sewer service". The remaining items are still at least somewhat unclear.

[solomon]

In many instances, the only information that the client has anywhere near readily available consists of a statement from a mortgage company of the amount of "real estate taxes" that were paid. The "Fixed Charges and Special Assessments" aren't broken out.

You are permitted to rely on such a document (I assume you mean a 1098) unless there is good reason not to do so.

From Cir. 230 10.34

"A practitioner advising a client to take a position on a tax return, or preparing or signing a tax return as a preparer, generally may rely in good faith without verification upon information furnished by the client. The practitioner may not, however, ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete."

[David1980]

As I recall, sewer assessments aren't deductible. They're considered an improvement, although I'm sure you already knew that. Often, taxpayer's are given the opportunity to pay large sewer assessments over time and have it added to their property taxes. When the property is sold, they have to pay up in full. So my guess is this isn't a deductible item. Typical sewer charges are part of the utility billing, not property taxes.

It depends. If the assessment is for building a new sewer then no, not deductible. If it's for maintenance and operational costs of the sewer then yes, that should be deductible.

Assuming this all showed up on a 1098 I'd just deduct the whole thing.

[S T]

Property Tax Deduction

This issue was addressed by the Joint Committee of Taxation in late 2006, but I could not find where it has been reintroduced or followed up.

The report encourages Congress to require local governments or mortgage lenders to report to the IRS the exact itemized details of property tax payments paid by homeowners each year. The committee suggests that incorrect property tax deductions cost the federal government some $20 billion a year. Back in 1993, a federal study revealed that nearly $400 million of that year's property tax write-off figures were too high, and the JCT report estimates that today's figures could easily be twice that much.
Tax Must Benefit Entire Community
Under the tax code as it currently exists, homeowners can legally write off local and state property taxes that have been assessed based on their local property valuations. However, other special levies and user fees, such as those that are designed to benefit individual households or particular neighborhoods, and not the entire community, aren't deductible. The problem occurs when sewers, sidewalks, and other special improvement projects are funded by tax levies on property owners who will be directly affected. When local governments send out tax bills each year, they don't generally send an exact breakdown to the federal government of how the money was allocated.
If such a property tax breakdown was provided to the IRS, the government would be in a better position to audit each homeowner's tax form to make certain they're only claiming that part of their property tax that benefited their entire community. Since lenders already are required to provide mortgage rate figures to the IRS, the committee contends that it wouldn't be that much more difficult to also report itemized figures for annual property taxes.

Sandy

[FEDUKE404]

Those 1098 numbers

I've had many discussions with folks re "taxes" shown on a mortgage statement. Many people tend to put the full amount on Sch A ("that's what the form says!"), somewhat akin to the path of least resistance.

In this area, the county/city tax bill always includes such goodies as fixed dollar amount "recycling fees" which clearly cannot be deducted. On property tax bills for automobiles, there is also included the annual city registration fee, which is also a fixed amount and cannot be deducted.

I sleep much better at night simply telling folks that there are some non-deductible fees that show up on their annual "tax bills." Our county tax bills (real and vehicle) are available online, and a few mouse clicks can quickly resolve the problem.

As for the original example given by Otis, it seems as if the various categories are just a breakdown of where the tax money goes. Anything that is a "fee" (i.e. not ad valorem) gets tossed, and apparently you also need to be a bit careful of any assessments that might appear on your regular "tax" bill.

FE

[DaveinTexas]

I was wondering when this would come up

This issue was addressed by the Joint Committee of Taxation in late 2006, but I could not find where it has been reintroduced or followed up.



Sandy

It seems to me that Congress is trying to further "reduce the tax gap" by asking the mortgage companies to report the amount of property taxes paid to the IRS. I've seen many times where I'll ask a client the amount of property taxes that were paid because they are paid outside of escrow. They always give me a blank stare and usually spit out a very high estimate, so I log on to the local tax assessor's website and plug in their information. It never fails that the amount paid is nearly $500 to $1,000 less than what the taxpayer told me.

Pretty soon, the IRS will require that churches and other charities to send out 1099s reporting the cash donations received by the taxpayer; if the amount exceeds $600---lol.

A second note and to add some controversy; the portion of the report says" If such a property tax breakdown was provided to the IRS, the government would be in a better position to audit each homeowner's tax form..." In a book by Dan Pilla, "IRS, Taxes and the Beast"; one of the premises of the book states, "In 1984, the IRS began to implement its secret plan to audit every citizen each year. To do this, IRS set out to eliminate deductions and cash, number every person and track all transactions."

I'll go back in my cave now.