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New Congress Surely To Look at “Oversight” in Homeowner Deductions

Now that the Democrats are in power, a new effort will be underway to get more compliance with the laws resulting in more revenue without having to raise taxes.

Right now under current code, homeowners can generally deduct their state and local real estate taxes. What many taxpayers do is look at the bottom line on their local tax bill and use that figure for their deductions. In many municipalities, extra "fees" for local improvements,(roads, new water mains etc) are added to local tax bills inflating their amount that the homeowner has to pay and thus those fees get deducted. The IRS has specific rules about what is "considered" state and Local real estate taxes.

Another example; Some local jurisdictions add the trash collection fees on the annual tax bill. If trash fees are $300 per year that means that many taxpayers (knowingly or unknowingly) have illegal deductions if they just use the bottom line on their tax bill. It is estimated these "oversights" may be in the hundreds of millions of dollars in lost revenue to the Government.

Imagine that, the Government subsidizing trash collection!

The tax committee staff said that local governments do not have to tell the IRS how the local tax bills were concocted, so many just add the "bottom line" to their deductions.

In a 1993 study, the Government estimated that $400 million of that year’s $11 billion in property tax deductions were improper.

The committee has come up with two possible scenarios to combat the problems.

Require local governments to provide copies of homeowner tax statements to the IRS with figures for regular and special- assessments.

Secondly, require mortgage servicing companies to report similar breakouts. This way the Feds can get detailed information which they can use for auditing purposes. If they catch one small undeserved deduction they may think there are more.

MORTGAGE INTEREST DEDUCTIONS

Another target in this "gap closing" is illegal deductions for mortgage interest. Many homeowners generally think they can deduct all mortgage interest. Homeowners who acquire a new mortgage and pay "points" at closing see these fees added to the regular interest on the loan. When a mortgage servicing company sends out interest paid statements, points are considered "prepaid" interest and are part of the total bill. The IRS says you have to write off points over the life of the mortgage loan. As you can imagine, many times homeowners just use the bottom line number from the lender inflating their deduction by thousands and in total many millions.

We will keep you informed as this GAP issue progresses in Committee and the near term implications it will have for our members.