Better read that letter again. Generally, escrow accounts do NOT pay interest. Additionally, the refund from the escrow account is *NOT* taxable income and you do *NOT* report it anywhere on *ANY* tax return.
The amount of your monthly mortgage payment contains three items:
1) The interest payment
2) The principle payment (this actually reduces your outstanding loan balance)
3) An *ESTIMATE* of what your property taxes and insurance will cost, that goes into the escrow account. The monthly escrow contribution is based on an "ESTIMATE" of what your property taxes and insurance will cost for the year. . If the "actual" amount of those two items is less than a given percentage of the estimate (commonly 10%) then the escrow account holder (usually the mortgage lender) is required by law to refund you the difference.
Money placed is escrow is "YOUR" money that you "ALREADY PAID" taxes on. It remains "YOUR" money until it's used to pay the insurance, property taxes, and anything else that your lender may require you to place in escrow, as a condition of you getting the mortgage loan.
You have already paid taxes on that money in escrow. If you report the refund of the amount from escrow, then you will pay taxes on tie *AGAIN*. Don't do that.
