1098 mortgage deduction too much of a good thing?

[leo24]

Due to the timing and price of my sale and purchase of my old home and new home, I end up paying more taxes when I try to use the 1098 mortgage deduction from both homes.  Am I obligated to file both or can I just use one 1098 to get the best tax rate?

Based on the warning in the 1098 it seems like it will be OK because none of the following will be triggered:

The information in boxes 1 through 9 and 11 is important tax information and is being furnished to the IRS. If you are required to file a return, a negligence penalty or other sanction may be imposed on you if the IRS determines that an underpayment of tax results because you overstated a deduction for this mortgage interest or for these points, reported in boxes 1 and 6; or because you did not report the refund of interest (box 4); or because you claimed a non-deductible item.

[RaifH]

Yes, you can treat the debt as not guaranteed by your home, and therefore not deductible. However, in later years if you change your mind you will have to get IRS permission to include it again.

That said, when you calculate your Outstanding Mortgage Balance using one of the methods prescribed by the IRS, it is very unlikely that adding another 1098 will reduce the total mortgage interest deduction unless you are paying a very low mortgage rate. 

TurboTax is finalizing the worksheet to calculate the correct outstanding mortgage balance which will greatly impact the amount of the deduction, particularly if you refinanced or purchased a new home during 2021. You can sign up here to see when the form will be ready.

[leo24]

Awesome,

I did the calculation by hand using the statements method and it is inline with what I was expecting.  I suspect the worksheet is not using zero for the months I didn't own the second place and jacking me over the 750K number, but I didn't bother trying to reverse engineer it.

Is there anyway to force the calculation so I don't have to wait for the update?

Leo

Statements provided by your lender.

If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year. You can treat the balance as zero for any month the mortgage wasn't secured by your qualified home.  For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. If your lender can give you your average balance for the year, you can use that amount

[RaifH]

Yes, you can force the calculation by using the amount you calculate for each loan as the Box 2 Outstanding Mortgage Balance amount. If this brings the total of your mortgage balance below $750,000 for the year, then you should be able to file without the finalized worksheet. 

If you do this, keep a record of your calculations and how you determined the number, since it is different than what is reported on the form. The form itself is not reported to the IRS, so this will not cause an automatic rejection or trigger an audit, but you will want to be able to defend your position in case they do ask. 

If your outstanding mortgage balance total is above $750,000 even after using the average mortgage balance for each loan, you may have to wait for the finalized worksheet. 

[leo24]

I just did the update the the worksheet still doesn't seem correct AND the link provided about the upcoming update seems to be deleted.

Basically, I had a second loan for 3 months out of the year, so using the IRS calculation the average is (9*0 + 3*outstanding)/12.

It is doing some other calculation that triggers the over 750K issue as the CA mortgage interest adjustment gets triggered when I do my state tax.

Is this going to be fixed?