This is an area of tax law that used to be straight forward and has become more complicated by the latest tax reform act. Limits on deductible mortgage loan balances, based on effective dates of loans etc have led to a “calculation formula” in TT that is just plain ugly and overly simplified.
In reality there are two main problems with this in TT right now as I see it.
Problem 1. Pub 936 Part II section “Home Acquisition Debt page 10, clarifies as follows:
"REFINANCED home acquisition debt. Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before refinancing . . . Any additional debt not used to buy, build . . . isn’t home acquisition debt.”
My layman’s interpretation of this is that without a cash out refi, the entire new loan is also home aquistion debt, and even with a cash out that perhaps covers the points, some 99% of the new loan is also “home acquisition debt”. I don’t see a way to account for this in TT as it stands.
Problem 2, The IRS Pub 936 for 2019, (latest avail as of 1/29/21) in Section II. "Average Mortgage Balance" states that the taxpayer determines the “average balance of each mtg” and has latitude to use a variety of methods which they detail. TT is not providing this information to their users, nor are they providing a means to enter an average balance the user determines following one of the IRS alternate methodologies. This is where the TT U/I need to 1) clarify the options for determining the average balance, 2) let the user select a method or 3, let the user enter their own calculated values for the avg balance.
I am not a tax advisor - that’s why I use TT. But I do have a background in software development and testing. As it stands now the Home Mortgage Interest deduction in TT has been overly simplified by their tech team to create a formulaic answer, without considering the full set of specifications required to handle the complete range of the most recent tax rules in this area. There does not appear to be a way to enter enough information in the U/I to get to accurate calculations for many situations, and then worse, no method for alerting the users of this limitation or a way for users to enter their correct directly bypassing the TT formula. IMO the TT test team has not run this through enough real world scenarios to identify that this is currently not producing accurate deductions for a wide number of cases involving refinanced loans.
