Entering multiple 1098s due to a refinance is incorrectly triggering the $750,000 principal limit on home loan interest deductions.

[JantovenNF]

@Cynthiad66 

This is improper advice, as it still leads to an erroneous calculation.  It may "work out" in terms of the mortgage deduction, but if you look at the average outstanding mortgage debt that doing this generates, it creates a very false number.

TurboTax must change its calculation so that it is properly done.

[Bostondoc84]

@Cynthiad66 

Please stop suggesting this. You are going to cause erroneous returns.

I have, just 8 posts above, explained in detail why this is not an exact solution (and tagged you in the reply). At this point I can only see this as willful ignorance.

A case example of why this error suppression strategy can prove problematic:

loan 1: $700k, held until June 2020

loan 2 (refinance): taken out on July 1 2020, $900k including cash taken out for home renovation or other reasons 

What you are suggesting is to ignore the 1098 line 2 for mortgage 2 and to report the entirety of mortgage interest as deductible. However, the actual average mortgage balance for the year 2020 is (700k + 900k)/2 = $800k. Of this, only $750k is eligible for a deduction. Thus, the actual mortgage interest paid needs to be multiplied by 0.9375 in order to calculate the deductible interest. Your method would have the filer illegally claim a larger deduction than they are entitled to. Alternatively, if 1098 line 2 for mortgage 1 were ignored instead, then the filer would lose out on the mortgage interest from $50k of debt. If mortgage 2 happened to be smaller than mortgage 1 (for example if additional principal was paid at closing), then the errors would be reversed but remain present. Another issue is that your strategy completely ignores the mortgage origination dates, which has implications also. Loans taken out before 2017 are deductible to $1M loan balance - by "zero-ing" out line 2 of the original 1098 TurboTax will apply the lower ($750k) limit even to acquisition debt subject to the $1M limit and thereby lose filers deductions.

My point is that these "solutions" are appropriate only for those filers sophisticated enough to understand the underlying rules. The kinds of people most likely to blindly take this advice, however, are unlikely to read IRS guidance documents. As we all know, ignorance is no defense in an audit. TT needs to formally address this calculation issue. 

Having read and thought about this issue more than I ever wanted to, my best advice to people in this situation (pending a proper fix) is to create and enter a "hybrid" 1098 which incorporates the average loan balance, the original origination date, and the totality of mortgage interest paid. This 1098 is never sent to the IRS so, while not ideal, should generate the right numbers. However this depends on carefully reviewing the rules for refinanced debt and ensuring your refinance does not run afoul of any of the rules regarding deductibility (for example if you took cash out for any reason).

@Bostondoc84 

Some TurboTax customers are experiencing an issue with their home mortgage average balance. This can cause the home mortgage interest to be incorrectly limited.  This may be affecting your tax return.

Please sign up for email notifications when an update related to this issue is available here.

See also this TurboTax Help.

[edited 2/9/21 | 3:24 pst]

[JoannaB2]

Some TurboTax customers are experiencing an issue with their home mortgage average balance. This can cause the home mortgage interest to be incorrectly limited.  This may be affecting your tax return.

Please sign up for email notifications when an update related to this issue is available here.

See also this TurboTax Help.

>

[PattiF]

TurboTax has a tip for this situation.

1098

[lchan]

TT sent out an email today saying they have fixed the problem. After updating my desktop version of TT a hyperlink at the bottom of the 1098 section had the following information. Here are the instructions according to TurboTax to address this issue:

Multiple 1098s related to a Refinance done in 2020

1. Input just 1 1098 to cover the refinance.
2. Gather all of your 1098s related to the refinance.
3. Separately add up the amounts in Boxes 1, 5 and any property taxes paid

4. Box 1, Box 5 and Property Taxes- Input the total amounts for each on the refinanced debt
5. Box 2- Input the amount of debt on 01/01/2020.
6. Box 3- Mortgage origination date- Input the oldest date on your 1098s related to the refinance

Now to see if it works...

[JantovenNF]

@lchan 

Unfortunately, that still doesn't seem to be an ideal solution, if you paid points.  If the loan registers as an active loan, it'll force you to pro-rate your points over the life of the loan.  For a re-finance, you can deduct all of the points you pay if the loan was paid off.  At least, that is my understanding of how points work.

And moreover, if you have multiple refinances, who do you put in as the lender, if you did it with multiple companies?

[lchan]

@JantovenNF 

yes, I quickly realized that the "fix" didn't work for a refi with points. ugh...

[ReneeM7122]

The recommendation is to combine all 1098 forms and enter as one. 

If your total home debt is under $375,000 ($250,000 for married filing separate) there is nothing new for you to do in 2020. Enter each 1098 as you normally would.

Home Debt Over $375,000

Under tax law, you are limited on the amount of home interest you can deduct. The limit is based on the loan amount and date of the origination of debt. We want to make sure we calculate this correctly for you. 

If you refinanced last year, you’ll have a Form 1098 from your previous lender and one from the lender you refinanced with. You’ll need both forms. 

Follow these steps to enter your mortgage information:

1. Gather all of your 1098 forms related to your refinance (the form from your original lender and the form from your new lender)
2. Grab a calculator and add together the box 1 amount from each form. Enter the total in TurboTax as Box 1 Mortgage interest.
3. Add the Box 5 amount from each form and enter the total as Box 5 Mortgage insurance premiums. (If you weren’t required to pay mortgage interest, these boxes will be blank on your forms and you won’t enter anything.)
4. Add the property tax paid from each form and enter it in the Property (real estate) taxes box.

Next, finish adding info for boxes 2, 3, 7, and 11 using Form 1098 for the original loan.

What if I have more than two 1098s?

You should combine all of the 1098s directly related to the refinance and enter it as one 1098.  An example of this is if you refinanced two loans into one loan. Any 1098s not directly related to the refinance should get entered separately.

What if I paid points?

Points on Loans Paid Off in 2020: Enter the points on your 1098 you have started and mark you paid off the loan when promoted.

Points on Loans on New Loans: You will want to enter a separate 1098 to cover these points paid. When prompted, enter 0.00 for Boxes 1, 2, 5, and the Property (real estate) taxes box, and checkbox 7, as you’ve already entered the details on your first 1098. For Box 3, add the date in 2020 when the loan originated.

@lchan

[JantovenNF]

@ReneeM7122 

The solution is to enter an entirely blank 1098, with the exception of listing points?  What?

I mean, entering one 1098 for multiple lenders for a refinance, then entering a second 1098 that solely just lists points, seems like an incredibly disingenuous work-around and tax audit flag for something that should be very, very simple to fix (a coding line that takes an average instead of adds numbers).

I'm incredibly disappointed that this is TurboTax's lackluster solution.

[KingRebecca]

I received an email notification that the issue was fixed - it is not fixed.  It is still capping my deduction on the mortgage that was sold by my re-fi lender as if there are two mortgages outstanding (there was only one mortgage on the house at any given time - the original, the re-fi, and then because the re-fi lender sold the loan my current lender).  When I go into the worksheet I can see the issue in the deductible home mortgage interest worksheet however it won't let me correct the average balance (one suggested "fix") and I can't figure out any other legitimate way to correct the issue. 

Is there another fix coming? 

[lchan]

@KingRebecca 

I hope so. I'm in the same position with an original 1098, a refi'd 1098 with points and then a final 1098 when my refi'd loan was sold to a new company. If I can make a simple macros in Excel to average the loan amounts instead of adding them (and I know nothing about coding) then the engineers at TT should be able to fix their software. Their approach to this situation is beyond frustrating and disappointing. 

[Derek415]

Also got an e-mail from TurboTax this is fixed, it's clearly not.

Loan 1: Original Loan from several years ago

Loan 2: Refinanced with points earlier last year at 3.5%

Loan 3: Refinanced again end of last year at 2.5% no points

I'm not confident adding the interest from Loan 3 to Loan 2 is going to give the correct results and not pose an Audit risk.

Does TurboTax plan to actually fix this? Looks like problem existed since at least 2019. These changes are from the Tax Cuts and Jobs Act of 2017, it's now 2021.

If TurboTax doesn't plan to fix, can we get a refund for a retail purchase made multiple months ago?

I've been using TurboTax for 20 years, but this year I may need to look at alternatives.

[GregM28]

I'm having the same problem with the mortgage interest deduction limit.  Since I bought and sold a home in 2020 I have two 1098s from the different lenders and like all of you TurboTax isn't figuring the average mortgage balance like the Pub 936 worksheet allows us. (It's just adding the 2 mortgages).  Maybe a workaround would be for TT to allow us to  OVERRIDE the incorrect balances on the worksheet using the instructions from IRS Pub 936.  This TT error would have cost me thousands of dollars I hadn't "caught" this error. Hope the coders can get this fixed soon. 

[Anonymous]

I too have multiple refinances last year and it appears the bug is still there after the latest update.  I too am worried about an audit if we do not match what is on the 1098s.  Please fix. 

[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

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