Adding more interest expense

[MonikaK1]

@DawnC is correct; enter the original loan amount in Box 2 for a loan that originated in 2023, even if the lender failed to include it on your form.

The IRS instructions for Form 1098, box 2, state:

Enter the amount of outstanding principal on the mortgage as of January 1, of the current year. If you originated the mortgage in the current year, enter the mortgage principal as of the date of origination. If you acquired the mortgage in the current year, enter the outstanding mortgage principal as of the date of acquisition.

[jyeh74]

@MonikaK1 @DawnC 

So when I do 2024 taxes next year, I want to know the principal balance as of 1/1/24?  
And why do they ask this?

Heloc loan originated in July 2023 and is used for primary house.  The other 1098 is primary loan that originated after 2020.  Both loans combined are over $750k.  

For the Heloc loan, why is it that when I enter box 1 - interest paid in 2023, my total refund increases?  But as soon as I enter the $100k as the principal balance for origination loan amount in 2023, the refund goes back down?  If it’s limiting the interest deduction due to the primary loan being over $750k, then adding Heloc loan should not change refund amount since anything additional would be limited and not make a difference in the total refund amount.  It goes up when I enter box 1.  It dramatically goes down when I enter the $100k principal balance.  So confused.

[DawnC]

Yes, we want to know the principal balance as of the beginning of the year.   The IRS lets you deduct your mortgage interest, but only if you itemize deductions. You can't deduct the principal (the borrowed money you're paying back).  In addition to itemizing, the principal amount of debt can’t exceed $750,000 to get the full deduction.   We ask that question because we need to know if the total amount of mortgage debt is over $750K.    You confirmed that it is, so we have to calculate the average principal balance during 2023 to figure the portion of your interest that is deductible.

When you enter the interest, the program adds the full amount to deductible interest.   But as you go through and provide the details, TurboTax applies the limitation.   Since you are using the desktop program, you can click on Forms at the top, and view your Deductible Home Interest Worksheet to see how the deduction limitation is applied.  

From IRS Pub 936 - Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). It must also be secured by that home.   If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that isn't more than the cost of the home plus substantial improvements qualifies as home acquisition debt.   

Home acquisition debt limit.

The total amount you (or your spouse if married filing a joint return) can treat as home acquisition debt on your main home and second home is limited based on when the debt is secured.   

For debt secured after December 15, 2017, the limit is $750,000 ($375,000 if married filing separately).  

[jyeh74]

@DawnC  Turbo Tax already limited my deduction when I entered the primary loan interest expense, since the primary loan is over $750k.  So when I add the second Heloc loan, it shouldn’t reduce my total refund further. The total refund should just stay the same and not allow more deduction.  Not reduce the refund.

[VolvoGirl]

If you are using the Desktop program then switch to Forms mode and check the whole 1040 before making the entries and then after each entry to see what changed.  You can print out the 1040 each time to compare them line by line.  

[jyeh74]

This is interesting.  Comparing Schedule A and line 8a and 17 in both scenarios.

8a - The number “home mortgage interest and points reported to you in Form 1098.  See instructions if limited”. This number is higher when just entering the primary loan.  Therefore line 17 “total itemized deductions” is higher.

8a - The number “home mortgage internet and points reported to you in Form 1098.  See instructions if limited”.  This number is lower when entering both primary loan + heloc loan.  Therefore line 17 “total itemized deductions” is lower.

So when you add more interest loans 1098, the refund doesn’t appear to stay flat.  As you add more interest deductions, the home mortgage interest reported actually DECREASES and lowers your itemized deductions.  Doesn’t really make sense to me.