Deductible Home Mortgage Interest Worksheet

[jaypops96]

I'm having a similar problem, but your solution doesn't quite get me through these challenges.  I'm using TT Online.  

We purchased our old primary residence in October 2017, and sold it and paid off the mortgage in September 2021.   We have a single 1098 for this loan, which lists an outstanding principal of $566,074 in box 2 (i.e., the principal on Jan 1, 2021).

We purchased our new primary residence in May 2021, and have a single 1098 for this loan as well.  It lists an outstanding principal of $820,000 (which was the original loan amount at purchase).  

Your suggestions get me through the initial 1098 entries, I divided the box 2 amounts by the percentage of the year that I held each mortgage.  But then there are additional reviews it makes me do where I need to input info that seems to conflict with the previous info I tweaked per your suggestion.  

But when i go to a final review of my federal taxes, and explore the independently- calculated values for the mortgage interest deduction (which I did using the IRS worksheet), TT is still shorting my deduction by about $4000.  

[RaifH]

It looks like your average loan balance for the year is around $900,000, which means some of your mortgage interest will be non-deductible due to the $750,000 limit. Although some of your interest is older than that and would be eligible for the $1 million limit, the limit is the greater of $750,000 or the outstanding mortgage principal subject to the $1 million limit up to $1 million. 

Without seeing your numbers, I can't say for sure if there is a miscalculation, but based on your outstanding mortgage principals, I would expect about 5/6 of the interest you paid to be deductible. That's quick, back of the napkin math. If it is anywhere in that ballpark, everything is probably entered correctly and TurboTax is correctly limiting the interest based on the IRS limits. If it is nowhere near 5/6, we may have to look a little deeper to see what's going on. 

@jaypops96

[Chris240]

Please, I also need help figuring out how to input four 1098 forms that I received for 2021 (all from different lenders), as TT seems to be adding them but they are all for my primary (only) house and I only had one mortgage at a time.  During 2021 I did a cash out refinance of an existing mortgage, then the refinanced mortgage was transferred to a new servicer.  Then I did one more refinance (NOT cash out) to bring the rate lower.  1098 #1 was from the existing mortgage that I had during the first part of the year (box 2 $692K), #2 was for the cash out refi (box 2 $780K), #3 was for the transferred loan (box 2 $774K), and #4 was for the second refi (box 2 $775K).  The total interest across all of them is ~$25K.  $15K of the ~$80K cash out was spent on home improvements.  I get that some interest will not be deductible due to the $750K limit and cash out, but TT is acting like none of it is deductible.  How do I enter these properly?  Thanks in advance!

[RaifH]

The $65,000 cash you took out that was not to substantially improve the home is considered home equity debt, and the interest paid on it would not be deductible. Since your remaining amount after that would be around $715,000, the rest should be deductible. If you did not pay any points or have already deducted all the points on your original loan or the cash-out refinance, then I would combine all four forms into one Form 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. Edit your existing 1098. You should only have one that contains all four 1098s.
3. Answer the questions and enter the information from your Form 1098s:
   1. Box 1 Mortgage interest - Add the amounts together from all 1098s
   2. Box 2 Outstanding Mortgage Principal - Use the amount reported on the cash-out refinance ($780,000)
   3. Box 3 Mortgage Origination Date - Use the original purchase date
   4. Boxes 5 & 6 - Use the combined totals from all 1098s
   5. Make sure Box 7 is checked
4. Answer What kind of property is this loan secured by?
5. Answer Yes or No to  We didn't pay any points. This is for the most recent refinance
6. Answer Yes to Let's see if this is the most recent form for this loan.
7. Answer No to Is this the original loan used to buy your property? 
8. Answer Yes to Is this loan a HELOC or a refinance? 
9. Answer Yes to Did you take cash out? 
10. Answer No to Have you used the money from this money exclusively on the home? 
11. Select Help me figure this out on the Let's see how much interest you can deduct screen.
12. Enter the amount you used on the home (the amount you refinanced plus allowable home improvements, approximately $692,000 + 15,000) then enter the balance due as of January 1, 2022 from your current loan. 

As long as the home acquisition portion of your loan is under $750,000, any interest spent on that is deductible. The portion of interest on the home equity debt of approximately $65,000 is not deductible. 

If you do have points left to deduct from either your original loan or your cash-out refinance, then you will need to report each 1098 separately and determine the average outstanding loan balance for each one. The end result should be the same, but more math and typing would be required. You determine the average monthly balance for each loan by taking the outstanding principal in Box 12, multiplying it by the number of months you had the loan, and dividing by 12. 

@Chris240

[jaypops96]

@RaifH Thank you for your reply, sorry for my slow response it's been a busy week at work.  Part of the problem here lies with the TurboTax Online inflexible inputs.  The other problem is the fact that IRS Pub 936 gives zero guidance for this fairly common situation.  Anyhow...  Here's the deal. 

I've gone through and manually calculated my average balances multiple different ways, per Pub 936:

Using the interest rate method for Avg Balance = interest paid / rate, I get:

Sold in Sept:  $17,222 / 3.875% =  $444,431 

Purchased May:  $11,736 / 2.875% = $408,198

Combined total (for line 12 in Pub 936) =  $852,629 

Using the monthly statement Avg Balance method from here, I get combined monthly mortgages of:

$    565,077	Jan
$    564,077	Feb
$    563,073	Mar
$    562,066	Apr
$ 1,381,055	May
$ 1,380,042	Jun
$ 1,377,588	Jul
$ 1,375,127	Aug
$ 1,372,659	Sep
$    814,229	Oct
$    812,778	Nov
$    811,323	Dec

Which comes out to an average of  $964,925 (for line 12), clearly not as favorable for me as the interest rate method.  

By the way, the DIRECTIONS of Pub 936, say "Figure the average balance for the current year of each outstanding home mortgage. Add the average balances together and enter the total on line 12."  Well, the paid-off mortgage is no longer outstanding.  So *technically* my "outstanding" balance is just the new mortgage avg balance for the year:  $815,661.  This is technically the most favorable value for me, though it does rely heavily on the word "outstanding" in the instructions.  

So let's fill out lines 1-16 in Pub 936, using Excel, and figure out what the final deductible interest should be, using those 3 different definitions of average balance. 

Line #	Literal "outstanding" balance method	Interest rate method	Averaging  Monthly Balances
1
2  (Sept Sale Avg balance)	$                561,045	$                444,431
3	$            1,000,000
4	$            1,000,000
5	$                561,045
6	$                561,045
7 (May Purchase Avg Balance)	$                815,661	$                408,198
8	$                750,000
9	$                750,000
10	$            1,376,706
11	$                750,000	$                750,000	750000
12 (Sum of avg bal on "outstanding" mrtgs)	$                815,661	$                852,629	$    964,925
13 (paid interest)	$                  28,957	$                   28,957	$      28,957
14	0.919	0.880	0.777
15 (deductible interest)	$                  26,626	$                   25,472	$      22,508
16 (nondeductible interest)	$                    2,331	$                     3,486	$        6,450
deductible interest fraction	0.92	0.88	0.78

Note by the way, that TT Online doesn't let me do ANY of this - the standard method in TT online is to just naively sum the total balances of my two partial-year mortgages and gives me a horrid result for deductible interest.  How am I supposed to enter values into TT online that remotely get me the correct deduction amount here?  At the very least I should be getting the deduction from the interest rate method, even if TT isn't taking into account the literal "outstanding" balance instructions.  

Thanks again for your help and expertise.  

[jaypops96]

@RaifH 

OK, an update - I just tried your method from here again, but this time I used the average balances calculated from the interest rate method, into the TT online prompt for "Box 2 - Outstanding mortgage principal".  I came up with the exact same deduction as my independent Excel calculation.  So that's a good sign.  

Is there a possible concern that the amounts I'm entering aren't ACTUALLY the "Box 2 - Outstanding mortgage principal", but rather the average annual balances for each mortgage?  Am I going to get audited for mis-entering entries on my 1098?  Or it's fine because the numbers match the instructions from the IRS in the end?

[DMarkM1]

The IRS already has your 1098s and no 1098s are submitted with your returns.  Therefore as long as the totals comply with IRS instructions on your return, you will be good.  Just be sure to keep records of your calculations should it ever come up.

[pd47]

I apologize for entering my question as a reply to this string. I cannot find a link for asking a question.

We paid off our mortgage in March 2022 (BoA), paying ~$420 in interest for Jan and Feb. We have received no tax-related forms from BoA. I tried to enter the interest payments but did not have the required information. Thoughts on how to resolve this?

[DianeW777]

No worries.  If you can itemize your deductions you want to be sure this is included.  

1. Under Deductions and Credits scroll to Your Home, then click show more.
2. Click Start or Revisit beside 'Mortgage Interest and Refinancing (Form 1098)'
3. Yes you have a 1098
4. Enter the mortgage interest and the date you originally started this mortgage (does not have to be exact)
5. Select 'We've already deducted.... points
6. Answer details about the loan (home equity, refinance, none)
7. Continue to 'Here's your 1098 info > Continue (you should see your mortgage interest entry)
8. See the image below.

• The standard deduction for married couples filing jointly for tax year 2022 rises to $25,900 up $800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950 for 2022, up $400, and for heads of households, the standard deduction will be $19,400 for tax year 2022, up $600.  
  • If you're at least 65 years old or blind, you can claim an additional 2022 standard deduction of $1,400 ($1,750 if using the single or head of household filing status). If you're both 65 and blind, the additional deduction amount is doubled

@pd47 

[pdwtn]

Thank you- I do not have the required form from BoA since the interest amount paid was <$600 (the actual interest paid was $417.29. Where/how to I enter this amount absent the BoA form?

[AmyC]

Sch A only submits one mortgage interest answer to the IRS. You can add your BOA to your current mortgagor, enter the total allowable interest and mark a balance below $750,000.

See Table 1 Worksheet to Figure Your Deductible Mortgage Interest - please double check before entering.

@pdwtn