Cashout Refinance in late December 2021

[slapshot2006]

Hello,

I apologize in advance for the long question, but I want to be as detailed as possible.

On 27-Dec-21, I refinanced my mortgage (cash-out refi).  I received the two 1098 forms, for my original and new mortgage.  There is an amount for Mortgage Interest (Box 1) for my original mortgage only...Box 1 for my new mortgage is Blank.

This is the same for the Real Estate Taxes Paid as well...there is only an amount for my original mortgage.

No points were involved for either mortgage and both mortgages are under $300,000.

Box 2 (Outstanding Mortgage Principal) is of course different for each of the mortgages, as is Box 3 (Mortgage Origination Date). 

So far, all of this is pretty straightforward for me, with the only difference being that my new mortgage has a small amount in Box 4 (Refund of Overpaid Interest).

However, afterview answering the TurboTax questions under Mortgage Interest & Refinance in Deductions & Credits, at no time does it ask about the Box 4 information and after answering all of the questions, TurboTax is not using my Mortgage Interest Deduction, as in previous years, but is stating that the Standard Deduction is preferable.  I find this highly suspect and I'm wondering if I did not correctly enter all of the information and answer the questions.

Can someone walk me through the "Mortgage Interest & Refinance" questions please?  (FYI...I use TurboTax Online)

Thanks!

[RaifH · Accepted solution]

Box 4 is a repayment of Mortgage Interest that you had paid in the prior year. If you selected Itemized Deductions in 2020, then you claimed the interest as a tax deduction in 2020 and will have to claim the amount in Box 4 of your 1098 as income. If you took the standard deduction in 2020, then you did not derive any tax benefit from the excess mortgage interest that they repaid to you in 2021 and do not have to do anything with the number.

To report your Box 4 amount only if you itemized deductions in 2020:

1. In the Federal section of your taxes, under Income and Expenses, scroll down to Less Common Income
2. Click Start/Revisit next to Miscellaneous Income, 1099-A, 1099-C.
3. Click Start/Revisit next to Reimbursed deductions from a prior year.
4. Click the box next to Other Itemized Deductions.
5. Enter the amount from Box 4 of your 1098 as Other Reimbursements for Prior Year Itemized Deductions.

To enter your mortgage information for your old 1098:

1. In the Federal > Deductions & Credits section of your return, scroll down to Your Home and click Revisit/Start next to Mortgage Interest and Refinancing (Form 1098)
2. Add another 1098 or edit an existing one
3. Answer the questions and enter or verify the information as it appears on your 1098. Make sure you have both the box 1 amount and the property taxes if they are reported on the form.
4. Answer What kind of property is this loan secured by?
5. Answer We didn't pay any points .
6. Answer No to Let's see if this is the most recent form for this loan.
7. Answer Is this the original loan used to buy your property?

For the second 1098, you would do the same except answer Yes in step 6. For Step 7, you would say No to Is this the original loan then Yes to Is this loan a HELOC or a refinance? and Yes to Did you take cash out? If you used the cash for anything besides improving the home, you would answer No to Have you used the money from this money exclusively on the home? You would then answer the follow-up question to determine how much of the interest is deductible. However, this year it will not have any effect at all because you did not pay any mortgage interest on this loan. 

Please note that going forward if you took cash out of your refinance to do anything other than substantially improve your house, that portion of the mortgage interest will not be deductible on your new loan. 

As for why you are still taking the standard deduction this year even after entering your 1098s, this can be due to a number of factors. Your second 1098 seems like a non-factor since you neither paid mortgage interest nor property taxes on that one. As long as your total Outstanding Mortgage Principal is under $750,000, your mortgage interest should be entirely deductible from the first 1098. Property taxes and other state taxes are deductible up to $10,000. Once you enter all your itemized deductions, TurboTax will automatically calculate whether it is more advantageous than your standard deduction.

[slapshot2006]

Thank you so much! This was very helpful!

So, I followed your directions and then finished the rest of my itemized deductions.  TurboTax Premier Online is still saying that the Standard Deduction ($25,100) is the best choice!

I clicked on the "Show me the breakdown of my itemized deductions" link and it showed my Itemized Deductions totaled $32,450.00!

Am I missing something?  Shouldn't the Itemized Deductions be the best choice? Please help!

Thanks!

[Vanessa A]

If you are looking at a summary screen, the number is the entries for the itemized deductions, not necessarily the total of your itemized deductions.

For example, if your summary screen is showing $15,000 in State and Local taxes, only $10,000 counts towards your itemized deductions because of the SALT limitations.

If your AGI is $100,000 and your medical expenses you entered totaled $12,000, only $4,500 would count towards your itemized deductions because you can only claim medical expenses in excess of 7.5% of your AGI.

Also, if you entered employee job expenses for your W-2 income, these are not deductible for your federal return, but they are for some states. 

So when TurboTax is telling you to take the Standard Deduction, it is accounting for the amount you can actually claim, not the amount that you have entered. 

If you want to see your actual Itemized Deductions that you could claim, you can walk through to the end of the deductions and credits section then you will see a comparison.  It will allow you to select Itemized Deductions instead of standard deduction.  Select Itemized Deductions then on the left side of your screen click Tax Tools>>Tools>> View Tax Summary.  You can then see the total of your Itemized Deductions.  

Also, if there is no difference in your refund, TurboTax is defaulting to the Standard Deduction unless you change it. 

[slapshot2006]

Thank you so much for your response!😊