california mortgage interest adjustment after refinance

[jgackson]

The current (not final yet) version of "540 Schedule CA California Adjustments" appears to be treating a refinance transaction as though I had two separate loans active, and therefore adjusting my interest deduction incorrectly. The original loan in question was in mid-2017, so qualified for the $1m cap rather than $750k, and so the California mortgage deduction should be the same as the Federal one.

TT (specifically the California mortgage interest deduction worksheet that feeds into Schedule CA) is adding the original loan's average balance to the refi loan's average balance, and dividing $1m by that total. What it should be doing is calculating the average balance for the year by prorating each loan's average balance--that is, for example, if the loan was refinanced on Sep 1, the average balance should be 2/3 of the original loan's average balance plus 1/3 of the refi loan's average balance, and the adjustment should be based on $1m divided by that prorated average. (The Federal step-by-step makes the same mistake, but it doesn't really matter since the interest-limit calculation is done by the user outside TT.)

TT isn't asking about the payoff date for the orig loan (even though there's a form entry for that), and then is ignoring how long each loan was held when it calculates the "average".

I can of course fix the problem by overriding either the calculated average balance or the interest cap, but I shouldn't have to do that. 

[VictoriaD75]

Schedule CA, Part II, lines 8e and 10 errors when attempting to e-file

Itemizing TurboTax customers with deductible mortgage insurance premiums may receive the following error when attempting to e-file their California returns:

Schedule CA:

Part II, Line 8e, Col A must equal the total of column A, line 8a, 8b, and line 8C

Part II, line 10, Col B must equal line 9

A fix is expected by February 6. You can sign up in the link below to receive notifications.

Schedule CA

[jgackson]

This doesn't appear to correct the refi average-balance error in the mortgage interest deduction worksheet for Schedule CA--although we can hope that gets fixed at the same time.

[KrisD15]

Itemizing TurboTax customers with deductible mortgage insurance premiums were receiving the following error when attempting to e-file their California returns:

Schedule CA:

Part II, Line 8e, Col A must equal the total of column A, line 8a, 8b, and line 8C

Part II, line 10, Col B must equal line 9

Resolved

We are happy to inform you a recent TurboTax update has been released resolving this issue. If you are using TurboTax Online, updates are applied automatically.  If you are using TurboTax Desktop, make sure you download and install the latest update.  If you need assistance with updating, please refer to the following support article.

How to Update TurboTaxhttps://ttlc.intuit.com/questions/1901183

[jeso8]

I am experiencing the same issue and it has not been fixed with the new update. The refinanced loans do not show up as paid off and therefore, add to the sum of total loan outstanding.

[flandar]

This sounds like the same error I'm seeing. 

When I add my 3rd 1998 form showing a deductable interest my CA taxes increase. 

It looks like the CA 540 part II "Interest you paid" line 8a added a $-4000 value.  This might be because it is adding up all 3 loan values treating my one property with 3 different refinance loans as one property with 3 different loans (a second and third mortgage, and therefore a $1.2million home/loan with different taxes).

When I add a test 4th 1998, it increase the tax by another $300 (and the 8a value changes to $-7000).

Wish I had caught this, before I efiled.  Now seems like I will have to file an amendment if this ever gets fixed.

[sachR]

I am seeing the same issue with the TT software. My mortgage was about $800k taken in mid-2017. I refinanced in Oct. 2019 and TT is calculating the average mortgage for 2019 as $1.3M. As others have pointed out, it is not taking the refinance dates while calculating the average mortgage for the year. It seems to (erroneously) think that I had both the mortgages for the entire year.

[VictoriaD75]

There is a workaround for this. 

For desktop versions:

• In Forms view, locate and click on Tax & Int Wks on the left from the forms list
• On the form, scroll to Mortgage Interest Limited Smart Worksheet
• Click on NO to the right of the question, Does your mortgage interest need to be limited

For online versions:

• Under Deductions & Credits, expand the menu for Your Home
• Click Start/Revisit next to Mortgage Interest and Refinancing (Form 1098)
• Click through until you get to a screen that says Do any of these situations apply to you? Mark Yes.
• On the next screen, take out the zero.
• Click back and choose No.

[sachR]

Correct me if I am wrong. The solution provided above is affecting Schedule A calculations for Federal Tax filing, and it appears to be incorrect.

The problem reported in this thread is for California 540 calculations. The TT appears to do the calculations correctly for Federal filing, but the problem occurs only for state (at least in my case).

[KrisD15]

@sachR

ONLINE USERS:

Please go back to the Home Mortgage Interest section:

Click Federal on the left side-bar

Click Deductions & Credits along the top

Scroll down to “Mortgage Interest and Refinancing (Form 1098)” Click Edit/Add

Scroll down the “Here’s your 1098 info” screen and click Done.

Next screen asks “Do any of these situations apply to you?” Select “Yes, one or all of these situations apply to me.” and Continue.

On the following screen, you will see the “Original amount”.

Enter the amount you can claim as a Home Mortgage Interest deduction in the “Adjusted amount” box. The Adjusted amount cannot be larger than the original amount or you will receive an error when trying to file. Instructions on who needs to adjust interest and how to calculate are available by clicking the blue “Help me figure this out” link.

DESKTOP USERS:

Go into Forms (top right)
Enter the amount on Tax & Int Wks
Mortgage Interest Limited Smart Worksheet section
Line A2

OR

Step by Step

Federal

Deductions & Credits

Mortgage Interest, Refinancing and Insurance Click Update

Click Done

Click Yes, one or both of these situations apply to me. And Continue

Enter the Adjusted amount and Continue

[KrisD15]

@sachR

If you need to adjust the interest claimed on your California return, you must enter the amount of the adjusment. 

[flandar]

Sorry, this is not the problem we are discussing. We are not trying to claim and "interest adjustment".  The issue is incorrect loan balance being doubled and exceeding the $1m threshold of CA and causing a % deduction in qualified interest deduction (when all interest should be deductible)

The issue is related to CA taxes "Deductible Home Mortgage Interest Worksheet" part 2 Qualified Loan Limit.  The form incorrecting calculates the "average balance of all grandfathered debt" with the sum of all debt, even when refinance/sold loans are for the same loan and there for the same debt and average debt over time.

So instead of an average debt of $400k, the form incorrectly reports our average debt at $1,200k (for three loans) and there for Part 3 only deducts the % upto $1,000k.

It seems that the "ending year balance" and "average balance" are incorrect.  The "average loan balance" on Federal Home Int Wkst, does not match

This issue still exists and is urgent.  Anyone in california (30 mil people) who refinance their loan in 2019 (a good year with low mortgage interest rates) will have this error. 

[flandar]

I think I've resolved this.  By manually updating the forms.

I reviewed my federal 1098 forms from my lenders and found on the Federal Forms there was no "Date loan was paid off" and "outstanding principal" values filled in.  These values are skipped in my 1098 form, but I can determine them by comparing to the other loan origination dates.

By entering the correct values in the form "Home Int Wkst" for each refinanced loan, the correct values of average loan balance are created and forwarded into the state.

TurboTax - needs to ask, if a loan is refi and paid off, but values left blank on 1098, so we can adjust these values in the step by step.  We need to add payoff date and payoff balance, or 

[jeso8]

I also noticed an issue that the average balance was not calculating correctly. They recently in the past 2 weeks added the "ending balance" entry for federal but the CA worksheet will take the average balance by taking the beginning and ending balance and dividing by 2 instead of taking into account how many months you've had that loan which is something it should be able to calculate since you also have to input the loan origination dates. I manually overrided the California adjustment myself since the amount should not be limited but I should not have to do this. 

[sachR]

I tried adding the "date loan was paid off" and "outstanding principle"  in federal 1098. But it did not transfer to state and the average balance is still more than the mortgage value. Did you do anything special to move/refresh the data from federal to state?

This is a bug, and I hope TT realizes it and fixes it before millions of people overpay their taxes.