1. I printed out the resulting forms and confirmed that TurboTax is automatically computing the correct limited deduction. The Schedule A and Deductible Home Mortgage Interest Worksheet have the expected values and calculations. I think the instructions were misleading.
2. Comparing the Schedule A Deductible Home Mortgage Interest Worksheet and the CA 540/540NR Deductible Home Mortgage Interest Worksheet, it appears that the $3,000 difference is due to an additional $100,000 allowed for home equity debt that raises the qualified loan limit to $1,100,000, compared to the federal limit of $1,000,000.
