Deductions & credits

This is a long post, sorry, but it explains what I've had to do to get a refinanced $1m+ mortgage's interest deduction get calculated correctly in TT (downloaded, not online). So far as I can tell, the problem can't be solved in step-by-step; rather, one must go directly to the Federal and California "Ded Hom Mort" worksheets and do some manual data entry and overrides.

My initial mortgage was in April 2017, and so has the $1m federal limit rather than the later $750k one. The refi was Aug 2019, but since it's a no-cash-out refi it too is subject to the $1m limit, since the earlier origination date carries through to the refi as the debt acquisition date.

First, the Fed form. The key here is to enter the "months loan outstanding" counts in the third line of Part 1, in addition to the interest paid on each loan in the first line. Then, in my case (a pre-15Dec17 original mtg), enter the beginning balance and principal applied for the orig and refi loans in the "......before Dec 15..." block; the worksheet will then calculate the end balance for each loan and the average balance adjusted for the number of months. That then flows down to line 2, on page 2, and further automatic calculations ield the deductible amount in Line 15, which then transfers to Schedule A. It would be nice if the step-by-step asked the right questions to fill out the worksheet, but at least the worksheet can be filled out without changing data from the 1098s.

Then the problem child, the California form. California sticks with the pre-2017 rules for my mortgages, so you'd expect its deduction limit to be the same as Fed--but no, since California allows an additional $100k on the limit (that is, you can deduct interest on up to $1.1m rather than the fed $1m). The California Ded Hom Mort worksheet looks like the federal one, but unfortunately it's quite different: it draws some data from the 1098s directly, doesn't understand that acquisition dates carry over to refis, and then fails to pro-rate the averages for the two loans (instead, it adds them together, so it appears there are two active mortgages rather than an original one and a refi).

The fix I found, until TT repairs the worksheet, is to override several entries and enter balances in a particular way. First, enter the months each loan was active in the third line. Second, override and delete the "Mortgage Origination Date" line for all loans in Part 1. Override and delete everything in the "on or after Dec 15" block (assuming, that is, that your orig loan was before that). In the "...before Dec 15" block, enter the begin year balance for the orig loan (which may be there already) and the same number as "principal applied", which will make the ending balance for the orig loan 0. For the refi, enter the initial balance at refi and the principal applied through end of year, and the worksheet will calculate the end balance. The worksheet will then calculate the average balance for 2019 as though there was one loan in effect for the entire year, using the orig loan's starting balance and the refi loan's ending balance. That's not exactly what the Fed worksheet does, and it'll be the same only if the refi was at the end of June. but (end-begin)/2 is California's averaging method.

The California worksheet calculates the allowable interest deduction on Line 12, and that then makes its way into the adjustment on Schedule CA.