home loan finance blog
If you’ve been writing off your property taxes on your federal income tax form every year, you may need to be more careful with your figures if the recommendations of a report are accepted and adopted into legislation by Congress. A congressional committee recently suggested that many homeowners have been deducting more property tax than they should from their taxes, which, according to the report, has been costing the government hundreds of millions of dollars every year.
Joint Committee on Taxation Report
The report was generated by the nonpartisan Joint Committee on Taxation (JCT), and proposes a way for the government to plug loopholes in the tax system. If the report’s recommendations are adopted, Congress may soon put greater limitations on the amount of property tax homeowners have legally been able to deduct at tax time.
However, the difficulty hasn’t been the fault of individual taxpayers. It has to do with how most local governments report their property taxes to their citizens. 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.
Tax Bill
Make no mistake. This report isn’t just idle talk. The JCT is a highly influential group of legislators that carries considerable clout on Capital Hill. That means their report will be given a serious look by fellow legislators, and that their recommendations are likely to make their way into a tax bill in the near future. Once that bill has been debated, don’t be surprised if it’s voted into law and becomes a part of the tax code as early the following tax season.