Property Tax deductions when there is an overpayment and refund the following calendar year

(sorry - in your case, check you first 1098 to make sure it's right, as you may get a second 1098 "adjusted" reporting form with the new amount after the county does their refund) As for the reassessment, being assessed lower won't necessarily reduce your tax, but usually would. Banks typically adjust escrow quarterly, so that adjustment won't come until after the following quarter when they get the new information on what is owed, tax-wise.

The IRS agrees with 2manyusernames. Specifically, http://www.irs.gov/taxtopics/tc503.html: "If a portion of your monthly mortgage payment goes into an escrow account, and periodically the lender pays your real estate taxes out of the account to the local government, do not deduct the amount paid into the escrow account. Only deduct the amount actually paid out of the escrow account during the year to the taxing authority."

I believe the mortgage tax form is a 1098, which you should get from your bank, which will be the actual amount paid, not the higher (or lower) amount you paid into escrow. You should use the tax form to enter your amounts. So, agreeing with the two above answers, but adding that you should be using your tax forms (1040, 1098, 1099, etc) to find the numbers you need to report.

IANYTA (I am not your tax accountant). It's actually pretty simple - you will receive a 1098 statement from your mortgage processor by the end of February. Declare your taxes paid deduction according to that statement. You will also receive a 1099-G from any government entity that paid money to you. Declare as income whatever is on those forms. It sounds like the refund was (will be?) made in 2012. If that is the case, you'll get a 1099-G from your city/town next year for the refund amount and should declare the refund on your 2012 return. If the town did manage to refund your money by December 31 2011, and your mortgage processor has already sent out 1098s, then, as rich says, you should wait for an amended 1098 from the processor. However, it's a bit strange that your town/city would send the refund to the mortgage processor rather than you. It doesn't have to be done that way. It's your money, not theirs. Having the town send it the mortgage processor just means you'll wait longer to get that money back. You should contact the tax collector's office directly and ask them to send the refund to you if it's not too late.

@dchase, I called the county tax collector's office myself this time and they were absolutely insistent that they will only refund the overpayment to the entity that originally paid the tax. (They do agree that there was an overpayment, though, so that's good, at least.) It turns out this wasn't even my mortgage company, but some company called Core Logic that I've never even heard of. This is the same county tax collector's office that refuses to send property tax bills to the mortgage company, insisting they will only send them to the property owner, whose responsibility it is to forward it to the mortgage company. As you say, it is my money, and I'm not sure why so many different hands need to touch it on its way back to me.

An update: The mortgage company now sent me a bill for around $450, claiming I have an "escrow shortage" due to some minimum balance requirement that they seem to have pulled out of someone's rear orifice. I can't afford that kind of a lump sum this month, so as "punishment" for their error, my monthly payment goes up $50, because of THEIR mistake. What chaffs me is the statement "your escrow account must have a minimum balance of $X,XXX at some point during the year." If I interpret that statement literally, it did meet that minimum balance requirement from the day of my closing up until the overpaid second property tax installment. So that, to me, means that I shouldn't have received a bill or an increase in monthly payment. I'm really annoyed. The county claims to have mailed a check for the property tax refund on January 6. Of course, the mortgage company claims not to have received it. I've just sent my information to my tax accountant to do my 2011 income taxes. We'll see what happens.

I called the mortgage company today and they confirm that they received the refund on February 9th, at which point they deposited it into the escrow account. The escrow analysis resulting in the bill I received was done on January 25th. Unfortunately, the new payment stands. I can ask them to do another escrow analysis whenever I want, but they only will change the payment if it "benefits you by more than $50 per month." The amount of my property tax refund divided by 12 is not even $20. On the other hand, the triennial reassessment should help, so I'll ask for another escrow analysis in July when we get the 2013 property tax bill. How this affects my 2011 income tax remains to be seen. My accountant has been e-mailing me almost daily with small detail questions, so this leads me to believe that they are working on it and will be done soon. I still have no idea where they pulled this minimum balance out of. All I've gotten is a response similar to the very parental "because we said so."