Why is TurboTax adjusting down my California "Interest and Points Reported on Form 1098"? I have no idea why. It should adjust up, because of federal limits.

[ethan4]

Sorry for the big subject line and not details -- I created this from within TT's online app.

TT asked me a few questions about the amounts of my two mortgages -- I refinanced my mortgage in 2019 -- including the balance of the mortgages at the beginning and end of the year, and also the assessed value of my home. It then told me to adjust downward my mortgage interest deduction by around $5,000. No explanation.

[DanaB27]

This situation sometimes comes up when entering your home mortgage interest. The following steps should resolve your issue:

1. Log into TurboTax and choose Deductions & Credits.

2. On the page “Your tax breaks”, select Mortgage Interest and Refinancing (Form 1098) and Start.

3. Delete any Forms 1098-MTGE you have already entered in the program. Then choose the button “Add a 1098”.

4. Enter the details from your FIRST Form 1098 – the one from your old mortgage company or before the refinancing occurred. Be certain to enter all the information, including the amount in Box 2 of your 1098. According to the updated 2019 instructions for Form 1098, Box 2 should show an amount. For a loan prior to 01/01/19, the amount should be the balance of your loan as of 01/01/19. For the loan taken out in 2019 (including refinance loan or when the loan is sold to another mortgage company), the balance should be as of the date of the loan origination. 

5. Continue through the interview until you reach the screen “Was this loan paid off or refinanced with a different lender in 2019?” If you’re entering the original loan, say No.

6. On the screen “Is this loan a home equity line of credit or a loan you’ve ever refinanced”, say No.

7. Continue to complete the first 1098.

8. Add your next 1098. Be certain to enter all the information, including the amount in Box 2 of your 1098. If there is not an amount in this box, please contact your mortgage lender for the amount. It is required for an accurate calculation.

9. When you reach the screen “Is this loan a home equity line of credit or a loan you've ever refinanced?” say Yes. Select the correct radio buttons and Continue to complete the interview.

10. Click Done. If presented with a followup question about the interest limitation and your loan balance is under $750,000 then your deduction is not limited - say No. If your loan is over $750,000 then the deduction is limited. Say Yes. You will need to manually calculate the adjustment. Please see page 12 of IRS Pub. 936 for a worksheet that will help you calculate the amount. 

[ethan4]

Hi Dana -- you said:

"5. Continue through the interview until you reach the screen “Was this loan paid off or refinanced with a different lender in 2019?” If you’re entering the original loan, say No."

Is there a reason to lie to TurboTax here? Or maybe I'm confused because the loan was refinanced with the same lender. The original loan has been paid off using the new loan from 2019.

What I did when entering my 1098s is identical to your instructions, except that I entered a "Yes" here.

FYI: when refinancing a loan for a home purchased before December 2017 (there's a lot of specific rules about the exact date) you get to keep the $1M mortgage limit.

[AmyC]

The goal is for your return to be correct. There is a difference between the program and the tax forms. The program tries to ask questions that fit the majority of users. Sometimes you just have to say a different answer to get the right answer on your tax return. If you need to lie on this question in the program, which the IRS does not see, to get the right answer on your tax return, which the IRS does see, well then, yes, use the answer that makes your return correct.

[ethan4]

Except I'm not asserting that I know if my taxes are correct. TurboTax asked some questions that I wasn't expecting, and then adjusted my taxes by thousands of dollars without explaining why. So I'm now confused as to whether there's something wrong with my taxes, or if I answered the questions incorrectly, or if TurboTax made a mistake.

[sandhya]

Hi,

I did not even get this question:

"5. Continue through the interview until you reach the screen “Was this loan paid off or refinanced with a different lender in 2019?” If you’re entering the original loan, say No."

Am I doing something wrong? Can someone walk me through the steps. I also see my state tax getting adjusted by 1000s of dollars.

Thanks so much,

Sandhya

[ethan4]

This may not be the answer you want, but my conclusion is that TurboTax's questions and calculations are completely wrong and will lead you to a bad return. You need to figure out the adjustment, if any, on your own and make it happen manually. It's been many months and no one has figured out an answer to this discussion thread.