Incorrect California mortgage interest calculations

[karl650]

Thanks for this community thread.

I encountered this issue in June, so TurboTax still doesn't have this resolved completely.

My situation is that I have a mortgage and HELOC both before Dec 2017.   I had a negative value in the Mortgage Interest calculation, which led me to begin doing research.   This thread will save me over $1000 in tax overpayment, so I really appreciate surfacing this error.

[DeniseMCPA]

Hello stan_sd,

I would like to address your issue on TurboTax allowing the $100,000 in home equity debt.  Per Publication 936, page 10 for Home Equity Debt - ignore the first sentence and pay attention to the second sentence, "In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit ($1,000,000), may qualify as home equity debt.  Home equity debt is a mortgage you took out after October 13, 1987, that:  1) Doesn't qualify as home acquisition debt or as grandfathered debt, and 2) Is secured by your qualified home."  As an example, let's say your mortgage loan is $1,200,000 and the limit is $1,000,000.  The remaining $200,000 may qualify as home equity debt, since it exceeds the limit and does not qualify as home acquisition debt.  (Home acquisition debt limit:  $1,000,000 - debt over this limit may qualify as home equity debt.)  TurboTax is correctly calculating the $100,000 limit for home equity debt  (the smaller of the $200,000 loan excess which didn't qualify as home acquisition debt or the $1,000,000 limit) since the rules state that the amount that doesn't qualify for home acquisition debt may now qualify as home equity debt.  It doesn't matter that there is no HELOC, what matters is that excess does not qualify as home acquisition debt, but instead as home equity debt.  I hope this helps!  

[DeniseMCPA]

Adding to post:  using Pub 936 for 2017 since CA does not conform to the federal $750,000 limit, they still allow the $1,000,000 limit on mortgages and $100,000 on home equity debt.

Mortgage interest

• Federal law limits deductions for home mortgage interest on mortgages up to $750,000 ($375,000 for married filing separately) for loans taken out after December 15, 2017 and no longer allows interest on equity debt.
• California allows deductions for home mortgage interest on mortgages up to $1 million plus up to $100,000 in equity debt.

https://www.ftb.ca.gov/about-ftb/newsroom/tax-news/march-2019/tax-deduction.html

[vschandra]

I've noticed the same issue of negative amount for "Adjustment of Interest and Points Reported on Form 1098" on screen "California Mortgage and Home Equity Interest".

I also have 2 mortgages (2 properties, 2 loans) and one of my loan has been transferred from one lender to another lender sometime in the middle of the year. When I entered the beginning and ending loan balance, I entered "0" for the loan which is transferred to another lender as at the end of the year, the loan balance from that lender is 0. This made the negative number go away and changed to 0 value. I hope this is helpful and is a solution for you too.

[sudeepsj]

Thanks a lot! this was helpful to me and helped me remove the negative adjustment amount that turbo tax was giving. Money saved !  

[josephinechan]

I did an amendment with the state and go extra refund back!

[LinaJ2020]

If you have more than one 1098 form, I will recommend you to combine all 1098 forms and enter as one. I am attaching a TurboTax link for the instructions how to do claim your mortgage interests.  Click here:

Multiple Form 1098s

Once the federal numbers are corrected, the state amounts should be adjusted. 

For tax years prior to 2018, your mortgage interest deduction is generally limited if all mortgages used to buy, construct, or improve your first home (and second home if applicable) total more than $1 million ($500,000 if you use married filing separately status). Beginning in 2018, this limit is lowered to $750,000.  For more information about the mortgage interest deductions, click here: Mortgage Interest deduction

[sdrury62]

This issue with the California mortgage interest calculation are still present as California taxes are not being calculated correctly. In fact they do not even add up right in the Federal 1098 Tax form for calculating federal taxes - really frustrating. Spent two hours with turbo tax "expert" in Florida yesterday to see why I had to pay California tax this year and I have been getting about 900 back the past three years - tried everything - she was very nice and helpful - she convinced me that the software was working correctly and I filed my taxes although both my federal and state taxes indicated I would be paying more although I only made slightly more in 2020 than 2019. Filed the forms. Federal tax form was accepted but California form was rejected. Email from turbo tax said there was a problem with the turbo tax software and I needed to log back in and they would "walk me through fixing it" - help instructions were useless - used help to ask for a person and said I had to call them and it was an 85 minute wait - got stuck in an endless loop where I was asked countless questions by robot - will try again tomorrow but have now spent more than 6 hours in total on this. Last year maybe an hour at most.

Can I ask for my money back? At least for the state filing? Is there better software out there? Maybe I should have just filed on the California FTB page? Will check out other options next year but this is really depressing that what seemed to be a useful set of software over the past few years is now so buggy you cannot trust it.

[Cass0317]

@sdrury62 Some of you have noticed an issue where your return has been in a pending status multiple days. This pending status means we noticed an issue that may have caused your return to be rejected and are doing an extra review to assess the reason it was flagged, resolve it for you, or identify what you need to do to ensure everything is accurate and your return is accepted.  If this applies to you, we will be sending you an email within 48 hours with confirmation that your return has been filed, or instructions for any additional steps that need to be taken to ensure an accurate return is filed, accepted, and you receive every dollar you deserve. We apologize again this has caused a delay in receiving your refund.

[mark_sd]

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.

[Herms23]

When doing my deductions for our home offices (had since we owned the home over 10 yrs ago), Turbo Tax puts in my other 1098 mortgage info including interest paid, but when it lists all my expenses for the office & entire home it shows $0.00

[sehoffma]

I just found TT has incorrectly calculated my California Mortgage interest from 2018-2020.  I don't know why TT is showing I have a HELOC.  This is horrible.  I am now spending days trying to fix these errors, which the State Review said there were no errors.  I cannot trust if any of the calculations are correct. 

[jimretz1]

Agreed. Now using TT for 2021 taxes, and the software is still not calculating CA mortgage interest correctly, and says to input the amount manually. TT should be able to calculate the correct number because the necessary mortgage balance, interest paid, mortgage acquisition date have already been entered. Very disappointing software programming.

[avinash82]

Hello @DeniseMCPA ,

Does this statement "debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit ($1,000,000), may qualify as home equity debt.  " hold even for 2021 CA taxes?

Specifically, I have $1,393,000 in mortgage on my primary home that was a loan originated in 2017 - so $1,000,000 limit applies. Can I take $100,000 of the remaining $393,000 as home equity debt? If so, how to accomplish that in the Turbotax forms? In 2021 Turbotax forms, they have separated out "Deductible Home Mortgage Interest in Acquisition Debt" and "Deductible Home Mortgage Interest in Non-Acquisition Debt". They seem to define "Non-Acquisition Debt" as "Home mortgage debt NOT used to buy, build or improve the taxpayer's home". Is this correct?

[mark_sd]

Original poster here. Well after three years of incorrect calculations (2018, 2019, and 2020), it looks like TurboTax Deluxe 2021 finally gets this right, at least for my situation.

The California Deductible Home Mortgage Interest Worksheet (Ded Home Mort) now has a Part 3 section that starts with, "Your state allows for an additional mortgage interest deduction on up to $100,000 of non-acquisition debt."

Sure enough, it calculates the "total deductible home mortgage interest" that I should get in California as equal to the interest reported on form 1098. It even correctly reduces that for the amount adjusted on form 8829 (home use deduction for my business). Then it makes the corresponding adjustment on Schedule CA.

I'm glad that this three-year bug appears to finally be fixed. I wonder how many tens or hundreds of thousands of dollars went into California coffers due to this Intuit error. Do they go back to notify users, "Oops sorry, we told you to overpay; you should re-file the last three years"?