Mortgage Interest Limitation not correctly calculating

The mortgage interest deduction is a common itemized deduction that allows homeowners to deduct the interest they pay on any loan used to build, purchase, or make improvements upon their residence, from taxable income. The mortgage interest deduction can also be taken on loans for second homes and vacation residences with certain limitations. The amount of deductible mortgage interest is reported each year by the mortgage company on Form 1098. This deduction is offered as an incentive for homeowners.

Many times homeowners can deduct the entirety of their mortgage interest paid, as long as they meet all requirements. The amount allowed for the deduction is reliant upon the date of the mortgage, the amount of the mortgage, and how the proceeds of that mortgage are used.

As long as the homeowner’s mortgage matches the following criteria throughout the year, all mortgage interest can be deducted. Grandfathered debt, meaning mortgages taken out by a date set by the Internal Revenue Service (IRS) qualifies for the deduction.

If you use the place as a second home—rather than renting it out—interest on the mortgage is deductible within the same limits as the interest on the mortgage on your first home.

• For tax years prior to 2018, you can write off 100% of the interest you pay on up to $1.1 million of debt secured by your first and second homes and used to acquire or improve the properties. (That's a total of $1.1 million of debt, not $1.1 million on each home.) The rules that apply if you rent out the place are discussed later.
• Beginning in 2018, the limit is reduced to $750,000 of debt secured by your first and second home for binding contracts or loans originated after December 16, 2017.
• For loans prior to this date, the limit is $1 million ($1.1 million without the $100,000 home

1. Single filers and those married filing jointly in most cases can deduct full interest on mortgages up to $750,000. 
2. If your second property is a personal residence, you're eligible to deduct mortgage interest in the same way as you would on your primary home—up to $750,000 if you are single or married filing jointly.

If you sold your home to buy this one, you won’t pay taxes on the first $250,000 (also known as a gain). If you file jointly, you won't pay taxes on the first $500,000. That income is free and clear as long as you owned the home, it was your main home for at least two years within the five years leading up to the sale. You also can only get this tax benefit every two years, so if you sold previously, make sure it’s been at least that long before claiming this tax benefit again.

Thanks, but the problem isn't with understanding the rules, its with the Turbotax software not applying the $750,000 limit correctly.

Here is a work around solution that will fix your issue.  It is not pretty but it works and provides the correct deduction.  Please try this:

First, adjust your total mortgage down to the $750,000.00.  Also, adjust the interest down to the amount that would apply to $750,000.00 loan amount.

How much mortgage interest can you deduct in 2020? For the 2020 tax year, the mortgage interest deduction limit is $750,000, which means homeowners can deduct the interest paid on up to $750,000 in mortgage debt.

The IRS lets you deduct your mortgage interest, but only if you itemize deductions. You can't deduct the principal (the borrowed money you're paying back).

In addition to itemizing, these conditions must be met for mortgage interest to be deductible:

• The loan is secured, which means the lender has some kind of guarantee of payment, usually in the form of property. If a borrower defaults on payments, the lender can seize the property that’s securing the loan. If you’re buying or refinancing a home, especially if it’s your first home, the loan is usually secured by the home you’re buying or refinancing.
• The home with the secured loan must have sleeping, cooking, and toilet facilities.
• The debt can’t exceed $750,000 (or $1,000,000 if the loan was taken before December 16, 2017) in order to get the full deduction.
• You or someone on your tax return must have signed or co-signed the loan.
• If you rented out the home, you must have used the home more than 14 days during the tax year or 10% of the number of days you rented it out, whichever is greater.

Mortgage interest is usually reported on Form 1098, Mortgage Interest Statement. After you enter your 1098 in TurboTax, we'll ask a series of follow-up questions to make sure you're qualified to take the deduction.

For tax years 2018 through 2025, you can only deduct the interest from the amount of your loan that was used to buy, build, or improve the home that it’s secured by.

If you’ve ever used part of this loan to pay for things other than this home, you cannot deduct the interest from that amount of the loan, even if the transaction didn’t take place this year.

Don’t worry, we’ll help figure out what amount of interest you can deduct.

Examples of common ways you might have used this money not on your home include:

• Making a down payment on a different home
• Funding improvements on a different home
• Making a payment on a different loan or debt
• Having miscellaneous large purchases

Example: John took out a home equity line of credit on his home on Tuberose Street for $40,000. He used $25,000 to remodel his kitchen and bathrooms in his Tuberose Street home, and $15,000 as a down payment on a second house on Snowdrop Lane. He can only deduct the interest he paid on $25,000 he used to improve his Tuberose Street home.

You cannot claim a mortgage interest deduction unless you itemize your deductions. This requires you to use Form 1040 to file your taxes, and Schedule A to report your itemized expenses. The interest payments and points you pay are combined with all other deductions you claim on Schedule A; the total of which reduces your income that is subject to tax on the second page of your tax return.

I am having the same problem. I am slightly over the limit but its only accepting about 75% of my interest. The actual ration of the limit to my total loans are around 99%.  Turbo tax is not calculating the limitation correctly.  

The work around does not indicate how to enter that in Turbo Tax. Shouldn't Turbo tax work correctly.  I used to be able to speak with someone if I had issue like this but can't find that help. Is it no longer available? 

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.

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Hello, 

can I ask for assistance on this as well? I have a original home loan dated 2/2017 for $890K and refinanced in 2020 so I got 2 1098s.  I should be getting 100% mortgage interest deduction because it is a “grandfather” which I did get it in 2019. But this year when I entered the 2 1098s separately, Turbo Tax doesn’t give me the full amount.  If I combined both box1 like the instruction says when I entered the data in my original lender screen, I got the 100% deduction. I am not sure whether the limitation in Turbo is set incorrectly when I entered these forms separately? And, should I just add them together? Thanks 

Hello, 

can I ask for assistance on this as well? I have a original home loan dated 2/2017 for $890K and refinanced in 2020 so I got 2 1098s.  I should be getting 100% mortgage interest deduction because it is a “grandfather” which I did get it in 2019. But this year when I entered the 2 1098s separately, Turbo Tax doesn’t give me the full amount.  If I combined both box1 like the instruction says when I entered the data in my original lender screen, I got the 100% deduction. I am not sure whether the limitation in Turbo is set incorrectly when I entered these forms separately? And, should I just add them together? Thanks 

Yes, I would combine these loans into one entry. As long as all three 1098's are for the same home, you may combine them. 

Yes, I would combine the two 1098's and declare that $860K is the loan balance when combining. Be sure to report that the mortgage origination date is February 2017 and not the refinance date.

Oh in the instruction, it says the box 2 I should used the original data from the original 1098 ( which would be the $890 that is showing there)...so are you saying I should report the new amount as $860 in the new 1098 from the refinance? 

Btw sorry, not trying to confuse you, I took out like $900K or something in 2/2017 when I bought my house. so this year the 1098s shows in box 2 (Outstanding mortgage principal) as $890K.  So should I enter this number, or $860k in my refinanced 1098?  Thanks so much.

Also, there is a “mortgage acquisition date” as 11/16/2020 in box 11 in the refinance 1098.  Do I need to enter this date in TurboTax? Or just ignore it?  I will enter the box 3, mortgage origination date as 2/2017 as in my old 1098. 

No, leave it blank.

Cool I will leave box 11 blank. What about the  box2 amount? Do I enter $860K (after refinancing)  or do I enter the $890K (pre-refinancing)? Thanks!

I would use the latest loan amount after refinancing but it really doesn't matter as long as it is is under the $1M threshold.

Oh I see. Thanks so much for your assistance. Greatly appreciated!

Sorry one more follow-up question: next year when I do the tax, I will have only one 1098 from this new loan company ( the one that has $860K). So should I just enter this new one and delete the record of the old but leave the Origination date as 2/2017, the original loan date? So that way I can be within the $1 million threshold, correct? 

Sorry one more follow-up question: next year when I do the tax, I will have only one 1098 from this new loan company ( the one that has $860K). So should I just enter this new one and delete the record of the old but leave the Origination date as 2/2017, the original loan date? So that way I can be within the $1 million threshold, correct? 

Your mortgage origination date is the date you took out your loan or, if it’s a refinanced loan, the date you refinanced it.

When you refinance a mortgage (in this case a new lender), the old mortgage ceases to exist - it becomes a new mortgage. 

@Bestvalue888

Hello,

I had originally purchased my home in Feb 2017. I had re-financed my loan last year. While entering the 1098's in TT I am not getting the entire deduction. It is only giving me a "portion" of the interest paid towards my deduction. As a result of this my taxes are increasing by approx. 4K.

My outstanding loan balance is $765,000.00.

Any idea on how to get resolve this?

I am kind of glad that tax filing deadline has been pushed to May 17th. Maybe TT will FIX this issue by then.

Thanks for your help and guidance.

if you refinanced your loan and it is now $765,000, the portion that is tax deductible is limited to $750,000.  

without more information, it's hard to tell whether a $4k reduction is correct or not.

1) how much interest was on the older mortgage reported on the 1098 and what was the interest rate?

2) same questions for the newer mortgage. 

I had originally purchased this property in Feb 2017 and have re-financed it couple of times already. Last year I was able to get the entire deduction even when the amount was higher than $750,000.

I don't think the rules have changed either in this scenario. I believe the rule of $750,000 does not apply to properties purchased before Dec 2017. (No?)

Details of both of my mortgages are below -

Mortgage 1 -- Loan Origination Date 06/28/2017. Interest paid on it for TY2020 - $16,820.77. Interest rate -- 3.875%. Pay off amount $763,101.00.

Mortgage 2 -- Loan Origination Date 06/15/2020. Interest paid on it for TY2020 - $10,013.34. Interest rate -- 2.93%. (This is re-financed new loan). This re-finance is a simple rate/term re-finance. I did not take any cash/equity out during the re-finance. Loan amount $765,000.00

@NCperson-- Is this what you were looking for?