How do I get through to Turbo Tax that the Mortgage Interest deduction is calculated wrong (software bug)? The TT tax experts agree it's incorrect.

[PatriciaV]

Please clarify what calculations you have identified as being incorrect for the Mortgage Interest deduction.

[zomboo]

This is a long-standing issue with Turbo Tax. One that I have tried numerous times to notify Turbo Tax about. I have described the problem over and over again to Turbo Tax tax experts, CPAs and even the Turbo Tax Community (last year). When I do explain the issue well enough, they agree there is an issue and tell me they will report it but nothing happens and no way to follow up with the same person. I have to start over again. If I am wrong about, I would appreciate an explanation why. With that said, here goes...

Turbo Tax does not divide the average of the acquisition portion of my mixed-use mortgage balance by the average total mortgage balance to figure the percentage of my total interest that I can deduct on schedule A. This is required for mixed-use mortgages and/or when the mortgages are limited to $750,00 / $1,000,000. Instead, Turbo Tax divides the year-end acquisition debt by the year-end total debt. In addition, Turbo Tax does not round the percentage to three decimal places as required by Pub 936.

[zomboo]

PatriciaV - Did you get a chance to view the reply I sent about a week ago?

[PatriciaV]

Yes, due to the complexity of some mortgage interest limit calculations, TurboTax directs you to compute the averages yourself in some cases. These are listed in the On Demand help during the follow-up questions on mortgage interest:

What mortgage situations are not fully supported in TurboTax?

TurboTax reflects the correct calculation for the mortgage interest in almost all circumstances. There are some uncommon situations where TurboTax does not gather enough information to fully calculate the deductible interest without some additional steps on your part. Examples of these are as follows:

• Transfer from a conforming loan amount where points are being amortized to a loan above $750,000 either through a home purchase or refinance.
• Refinances or sale a home while owning a second home where the total debt exceeds the allowed loan limits
• More than 5 1098s and exceeds allowed loan limits
• Debt above limits and also uses a part of the home for a rental or home office
• Someone who wants to use another method of averaging loan balances other than the beginning and ending balance method.

These calculations are found in IRS Pub 936 Part II, Limits on Home Mortgage Interest Deduction in the instructions for Table 1. If you find you are unable to complete these calculations yourself, we recommend you contact a local tax professional who can assist with your specific tax situation.

[zomboo]

The issue I am trying to report has nothing to do with the balance limitations of $1,000,000 or $750,000 stated in Pub 936. Table 1 in Pub 936 is used to apply these limitations (Part I) and calculate the percentage of total interest paid that can be deducted (Part II). The percentage is calculated by dividing the average acquisition debt by the average total debt.

Turbo Tax does not use the average balances to calculate the percentage of total interest to deduct. Instead, Turbo Tax is using the end-of year balances and apparently not rounding the percentage to three decimal places called out in step 14 of Table 1.

Turbo Tax (online) does not provide an option to enter the average balances or deductible interest manually this year. It did last year but had it's own collection of software bugs.

Please don't rely on information from Turbo Tax documentation on what the program is suppose to do. Look into what the program is actually doing. Below are calculation examples from my return.

Mortgage Balance: 309,110.03 (Dec 31) - 302,581.52 (Jan 1)

Acquisition Balance: 183,116.82 (Dec 31) - 183,116.82 (Jan 1)

First (Dec 31) & Last (Jan 1) Average: 183,116.82 / 305,845.78 = .59872273 = 59.9%

Ending Balances: 183,116.82 / 302,581.52 = .60518177 = 60.5% (Turbo Tax uses 60.518177%)

Technically, the first & last average method does not apply for Mixed-Use mortgages. The average of 12 months must be used (Pub 936 p. 12 top of 3rd column).

[PatriciaV]

If your deduction is limited, TurboTax will provide a box for you to enter the interest amount you calculated. This is found AFTER the mortgage entry section (click Done under the list of mortgages you entered).

As mentioned above, some situations require additional calculations that are not supported in the software. The direct entry box is provided if you find yourself in this situation. 

If you're not presented with this option in TurboTax Online, you will need to complete your return using TurboTax for Desktop and access the relevant worksheet(s) using Forms Mode (see How do I switch from TurboTax Online to the TurboTax software?).

[zomboo]

This is not a special situation. It is a serious miscalculation of the Turbo Tax software. One that should be a simple fix with the information already entered and yet is completely ignored by Turbo Tax. Table 1 of Pub 936 requires the average balances be used to figure the acquisition debt limitations for 1) Balances in excess of $1,000,000 or $750,000 and 2) mixed used mortgages consisting of acquisition and non-acquisition debt (equity debt in Pub 936). The only mortgage situation that doesn't require Table 1 is one that consists entirely of acquisition or grandfathered debt and the balance is below the limitations at all times during the year.

Again, Turbo Tax uses the ending balances instead of the average balances to calculate the percentage of interest to deduct on 1040 Schedule A. There is no situation in Pub 936 that allows this and no reasonable explanation for why Turbo Tax does it this way. I am convinced it is a software bug.

I went back into my return on Turbo Tax (Online) to look for the option to enter my own values and did not see the one that you described. However, on the page for entering Form 1098, the little help button next to box 1 explains that all interest is not deductible and suggests the user calculate the amount that is deducible in Box 1 and enter an explanation for entering a value that differs from the Form 1098 value. This is unacceptable and it doesn't work. Turbo Tax uses the value entered as the total interest paid in it's calculations that are already incorrect. The help message is misleading and produces erroneous results.

By switching to the download version of Turbo Tax, you are suggesting I pay for a product that I have already paid for online to manually manipulate faulty Turbo Tax calculations in the worksheets. Seriously?

[MoniqueLO_]

If you would like to switch to the desktop, please contact Customer Support so you can speak with a TurboTax representative who can assist you to avoid paying twice. 

@zomboo