Hi Kat,
Thanks for your message.
By the IRS website, lenders use Form 1098 is to be used, "...to report mortgage interest (including points, defined later) of $600 or more you received during the year in the course of your trade or business from an individual, including a sole proprietor." Box 2 on form 1098 reports the principal loan balance as of January 1 of the reporting year. That is, the loan balance at the beginning of the year, not the year-end balance. Institutions transferring loans to contra financial institutions have the reporting requirement; the receiving institution does not have the responsibility of reporting this information because they were not the servicing institution at the time the loan balance was established. They will have this responsibility for the following reporting year if they remain as the servicing agent.
The problem with TurboTax is that it does not permit the user to proceed with the preparation of the tax return if Box 2 is left blank (empty) as shown on Form 1098 (as in my situation) because the software requires a value in the Box 2 field of the step-by-step data entry. TurboTax then aggregates the Box 2 information to determine the loan balance which results in erroneous mortgage indebtedness. Put another way, it appears TurboTax automatically assumes two 1098's must represent two loans (e.g., 1st DOT, 2nd DOT, etc.). ONE LOAN that is sold between financial institutions IS NOT TWO LOANS, but generates TWO 1098's. The issue becomes more critical when the user prepares their State return, especially in California where loan balances commonly exceed $500,000. TurboTax thinks there is a single loan in excess of $1MM which triggers certain tax situations that reduce the taxpayor's interest deduction, thus resulting in an erroeously increased tax liability.
I was able to work around this issue by leaving the field blank and switching to the Forms View before selecting "continue". After reviewing the reporting form to ensure it accurately reflected the 1098 issued by the servicing company, and then switched to another form in Forms View to save my information before switching back to the step-by-step feature.
Allowing TurboTax to accept a blank field in Box 2 of the step-by-step form would solve this issue. A follow-up screen could appear after the form was complete to confirm with the user that in fact the Box 2 field is blank on Form 1098 before continuing with the data entry.
Hope this is helpful... thank for your interest!
Joseph
@Kat
