How to do Deductible Home Mortgage Interest adjustment for California?

[LenaH]

Thank you for your patience. 

As per the Schedule CA instructions, California limits your mortgage interest paid deduction to the first mortgage debt of up to $1,000,000 for the purchase of the home, plus an additional $100,000 of home equity debt. In your situation, you have one mortgage and do not have home equity debt. 

Since your mortgage debt was dated in 2015, the federal grandfathered limit is $1,000,000. Therefore, the deductible home mortgage interest of $29,530 on your federal return is the same amount that should be on your California return. No adjustment on Schedule CA is necessary in this situation. 

@dh123 

[smileyborg]

@LenaH The IRS clearly ruled that for home acquisition mortgages acquired prior to 2017, the mortgage interest deduction limit is $1,000,000 plus the $100,000 home equity debt limit (i.e. an effective limit of $1.1 million total), when the mortgage acquisition debt exceeds $1 million and the FMV of the home is at least as much as well. See IRS Revenue Ruling 2010-25 here: https://www.irs.gov/pub/irs-drop/rr-2010-25.pdf

The federal tax law changes for TY2018 suspended the extra $100,000 home equity debt limit for the mortgage interest deduction federal taxes, but California tax law does not conform to that change (as the Schedule CA instructions you linked explain). So the effective mortgage interest deduction limit for California state taxes remains $1.1 million for home acquisition mortgages dated prior to 2017.

In any case, the much more important point here is that TurboTax Online does not (and has never) performed the California state adjustment calculation here — TurboTax Online specifically requires the user to manually enter the mortgage interest deduction amount they want to use for California state taxes in the UI (see the screenshot I provided earlier in this thread). And prior to TY2022, that value was correctly used and reflected on the generated tax forms, but starting in TY2022 that no longer works. This is clearly a basic logic bug in the TurboTax Online software, where the user-entered value is being completely ignored and never used, and there is no way to work around this bug.

[dh123]

Yes, thanks @smileyborg.  That's correct.  I was writing a similar reply at the same time.

• In 2009 the IRS issued a memo to give guidance on this issue.  They said, "Indebtedness incurred by a taxpayer to acquire, construct, or substantially improve a qualified residence can constitute home equity indebtedness to the extent it exceeds $1 million (subject to the $100,000 and fair market value limitations imposed on home equity indebtedness by § 163(h)(3)(C))".
• Previously, this applies to both Federal and CA, and there's no difference.
• The Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017 limited the federal home equity indebtedness deduction.
• The CA FTB clarified that CA does not conform to these changes, leaving the previous status quo. It says, Federal law suspended the deduction on up to $100,000 ($50,000 for married filing separately) for interest on home equity indebtedness... California does not conform. If your deduction was limited under the federal law, enter an adjustment on line 8, column C for the amount over the federal limit."

Furthermore, the CA adjustment functionality worked in TurboTax online for TY2021, TY2020, TY2019, etc.  So something broke.

[pkp2]

I have the exact same issue -- TT Online is not adding my mortgage interest to CA return. Can someone please help. I tried deleting and then recreating CA return and that does not help. 

[MonikaK1]

In most cases, you don't have to do anything in the California return with home mortgage interest - TurboTax has already made any needed changes. 

Have you looked at your complete California return in TurboTax Online? You can do that if you have already paid for your TurboTax product. You can preview your return before filing to find out how your taxes were calculated. See here for details. Look at the Schedule A in the California return.

When you complete the California section in TurboTax Online, and you reach the screen, "Here's the income that California handles differently", one of the listed items, under Home, is Mortgage Interest Adjustment. The Learn More link next to that item states: 

California does not conform to the new federal law that limits taxpayers to the interest on $750,000 ($375,000 for married filing separate) of home mortgage acquisition debt. California allows taxpayers to deduct interest on loans up to $1,000,000 ($500,000 for married filing separate). Additionally, federal law also limited the deduction on up to $100,000 for interest on non-acquisition (i.e. home equity) indebtedness, unless the loan was used to buy, build, or substantially improve your home that secures the loan. Important Note: This impacts loans originated on or after December 15th 2017. Loans originated prior to this date are grandfathered. In this situation, no adjustment would be necessary.

We've calculated the amount of deductible interest and points on acquisition debt, including the amount of the loan over $750,000 (but not over $1,000,000). In addition, the deductible amount includes any amount of non-acquisition loan interest you paid.

Why would I adjust my mortgage interest?

We have calculated your deductible California interest and points based on what's called the "Average of first and last balance method". If you paid your mortgage unevenly during the year, borrowed new amounts during the year, or would otherwise prefer to use another allowable method of calculating your interest, you may modify the mortgage interest adjustment.

If you have looked at your complete California return and there is NO mortgage interest on California Schedule A, please confirm.

@pkp2