As of March 16, 2021, TurboTax is still wrong for tax year 2020. Since California does not conform to the 2018 federal changes, my mortgage deduction should be about $1500 higher than on the federal form. TurboTax's calculation REDUCES my deduction by almost $1500, meaning I would be taxed on $3000 more than I should be.
The main issue comes down to the home equity cap. I have a $200,000 HELOC. Rounding the numbers, $150,000 is invested in the home and home improvements. $50,000 was spent on other things. Now let's look at California's 2020 Instructions for Schedule CA (540) https://www.ftb.ca.gov/forms/2020/2020-540-ca-instructions.html, which give a little more detail than the article cited by @DeniseMCPA:
Line 8 – Home Mortgage Interest
Federal law limited the mortgage interest deduction acquisition debt maximum from $1,000,000 ($500,000 for married filing separately) to $750,000 ($375,000 for married filing separately). California does not conform. If your deduction was limited under federal law, enter an adjustment on line 8, column C for the amount over the federal limit.
Federal law suspended the deduction on up to $100,000 ($50,000 for married filing separately) for interest on home equity indebtedness, unless the loan is used to buy, build, or substantially improve the taxpayer’s home that secures the loan [emphasis mine]. California does not conform. If your deduction was limited under the federal law, enter an adjustment on line 8, column C for the amount over the federal limit.
They’re saying that before 2018, Federal law capped home equity deduction at $100,000 unless used to buy, build, or improve the home. In other words, you could use the $100,000 to buy groceries or tuition or a car. There is no cap if invested in the home.
The thing that TurboTax misses is that the home equity limit does NOT apply if you invest the equity debt in the home. TurboTax, on the California return, applies a hard limit of $100,000 for ANY home equity debt, so it says only 50% of my $200,000 loan is deductible. Instead, for the California return:
$150,000 is invested in the home and is fully deductible.
$50,000 was spent on other things. Because it is less than the $100,000 limit for non-home spending, it's also fully deductible.
Bottom line, I have to make manual adjustments to deduct the full $200,000 home equity loan in California.
