Deductible Home Mortgage Interest Worksheet

[drs253]

Does anyone know other tax software solutions that actually handle this scenario?  After using TT for over 15 years, I'm done.  Not being able to handle a refinance gracefully (especially after record low interest rates) is completely unacceptable.

[corokiachristine]

Same issue here. I have three 1098s and TT is adding them all and limiting my mortgage interest deduction. Why can't they fix this issue? If I was a person who didn't know any better, I would lose out on thousands of dollars of a refund. Not cool at all.

[JohnB5677]

Some TurboTax customers are experiencing the following error message when running the Federal Error Check 

Check This Entry: Tax and Interest Deduction Worksheet: Limited Interest and Points must be entered

If you're experiencing  the error above,  please go here to receive email notifications when any updates related to this issue become available.

As a work around  you can consolidate the 1098's and get an accurate result.

• Total all of the Box 1 Mortgage Interest received .
• Use the entry in Box 2 Outstanding Mortgage Principal from the most recent mortgage.
• Total all of the Boxes 3,4 & 5
• Enter only the most recent mortgage points for Box 6.  (Any previous points will be deducted when those mortgages were closed.) 

[drs253]

How do you total box 3 (which is a date)? @JohnB5677 

[JohnB5677]

I had a finger slip.  You are correct that you can not total box 3.  However, this will give an accurate assessment of your deduction.  I also do not advise posting directly to the forms mode in the CD version.

[PACBELL]

Although the new display screen was added.  It appears the software is still not calculating the Average Monthly Balances correctly for each loan.

[hornet96]

As others have noted, this is a non-answer and is a very lazy, and potentially dangerous, approach being taken by TurboTax.  Banks are required to report 1098 info separately to the IRS, so it should be able to be entered separately into TurboTax in order to match up against IRS records. Further, the instructions are very unclear and can easily lead users to miss this programming defect and artificially pay more in income taxes than they should.  If this ends up being the "final" workaround answer from TT, I am going to have to look elsewhere for tax software as it begs the question - what else is TurboTax missing in its programming that is leading to a higher tax bill than is necessary?

[PACBELL]

You must manually calculate and then correct the "Average Monthly Balance" for each loan.  The Average Monthly Balance must be weighted based on the length of time the loan existed for the current Tax year.  The IRS allows different ways of determining the Average Monthly Balance because it is not correct to say your average annual balance is the sum of loans that existed for the entire year.  Your taxes are annual, so in this case, the loan balances must be normalized for the year. And the 2020 tax year was 366 days (12 months).

All of this info is from IRS Publication 936 (This is a 2019 form but it is current for this year.)

https://www.irs.gov/publications/p936

If you want to know how to do this, it is spelled out here:

https://www.irs.gov/publications/p936#en_US_2019_publink

(After publink type the numbers (no spaces), One Zero Zero Zero Two Three Zero Zero Two Eight)

(You think being a tax site, that they would write the posting software to understand IRS URLs and not presume the numbers to be a phone number.)

This section is titled: "Average Mortgage Balance"

There you will see that there are different ways of calculating the average mortgage balance.  You read through the Publication to determine which method that is best for you.

The first method is:

Average of first and last balance method. - This is the method that TT is using, however this only works if you only had one home loan for the year.  As you see the second bullet point for using this method states,

"You didn't prepay more than 1 month's principal during the year. (This includes prepayment by refinancing your home or by applying proceeds from its sale.)"- You see that comment in parenthesis is very critical.  If you refinanced, you did prepay. 

Please also be aware of the other bullet points because as it says, "You can use this method if all the following apply."

What this means is that you did prepay and therefore you have not met a required condition to use this method. You can only use this formula in very specific terms where you didn't change the loan during the year, because it is the most simple way of determining an average.  

The second method is: 

Interest paid divided by interest rate method.

The third method is what we will use for those of us that re-fide or HELOC-ed:

Statements provided by your lender

 https://www.irs.gov/publications/p936#en_US_2019_publink# 

"If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year. You can treat the balance as zero for any month the mortgage wasn't secured by your qualified home. 

For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. 

If your lender can give you your average balance for the year, you can use that amount."

This method is where I have repeated since last year to use.  I didn't pull it out of thin air either.  You can read it for yourself and I directly copied and pasted it.

Please continue to read past this point in the Publication because it goes on to give direct examples for what I have said.

Mixed-use mortgages.

https://www.irs.gov/publications/p936#en_US_2019_publink# 

This section further elaborates, "For example, a mortgage you took out during the year is a mixed-use mortgage if you used its proceeds partly to refinance a mortgage that you took out in an earlier year to buy your home (home acquisition debt) and partly to buy a car (home equity debt)."

If you want to be really precise, you can average at a higher resolution and weight the balances by the number of days during the year the loan existed.  Unless you are right at the cutoff limit, it probably isn't worth doing this.  And the IRS Pub doesn't give any examples broken down by day, so I am not sure on the acceptance of it. But I like it better as it is mathematically more proper since our loans are as precise as a day.

Also, if you have two loans at the same time, you need to sum those balances before averaging but only for the time they existed at the same time. 

[PACBELL]

You must manually calculate and then correct the "Average Monthly Balance" for each loan.  The Average Monthly Balance must be weighted based on the length of time the loan existed for the current Tax year.  The IRS allows different ways of determining the Average Monthly Balance because it is not correct to say your average annual balance is the sum of loans that did not exist for the entire year.  Your taxes are annual, so in this case, the loan balances must be normalized for the year. And the 2020 tax year was 366 days (12 months).

All of this info is from IRS Publication 936 (This is a 2019 form but it is current for this year.)

https://www.irs.gov/publications/p936

I tried to post the direct URL but the system flagged my response as spam.  So you will have to use the links on the left side of the webpage to find the section, or just do a find on page.

You think being a tax site, that they would write the posting software to understand IRS URLs and not presume the numbers to be a phone number.

This section is titled: "Average Mortgage Balance"

There you will see that there are different ways of calculating the average mortgage balance.  You read through the Publication to determine which method that is best for you.

The first method is:

Average of first and last balance method. - This is the method that TT is using, however this only works if you only had one home loan for the year.  As you see the second bullet point for using this method states,

"You didn't prepay more than 1 month's principal during the year. (This includes prepayment by refinancing your home or by applying proceeds from its sale.)"- You see that comment in parenthesis is very critical.

Please also be aware of the other bullet points because as it says, "You can use this method if all the following apply."

What this means is that you can only use this formula in very specific terms where you didn't change the loan during the year, because it is the most simple way of determining an average.  

The second method is: 

Interest paid divided by interest rate method.

The third method is what we will use for those of us that re-fide or HELOC-ed:

Statements provided by your lender

"If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year. You can treat the balance as zero for any month the mortgage wasn't secured by your qualified home. 

For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. 

If your lender can give you your average balance for the year, you can use that amount."

This method is where I have repeated since last year to use.  I didn't pull it out of thin air either.  You can read it for yourself and I directly copied and pasted it.

Please continue to read past this point in the Publication because it goes on to give direct examples for what I have said.

Mixed-use mortgages.

This section further elaborates, "For example, a mortgage you took out during the year is a mixed-use mortgage if you used its proceeds partly to refinance a mortgage that you took out in an earlier year to buy your home (home acquisition debt) and partly to buy a car (home equity debt)."

If you want to be really precise, you can average at a higher resolution and weight the balances by the number of days during the year the loan existed.  Unless you are right at the cutoff limit, it probably isn't worth doing this.  And the IRS Pub doesn't give any examples broken down by day, so I am not sure on the acceptance of it. But I like it better as it is mathematically more proper since our loans are as precise as a day.

Also, if you have two loans at the same time, you need to sum those balances before averaging but only for the time they existed at the same time. 

[PACBELL]

I agree completely telling people to consolidate their 1098s is wrong.

Also wrong is the link to the 375k limit post is completely wrong. it is 375k for married filing separately.

[drs253]

I think the $375k is another logical error by the employee that posted it.  If you refinanced once and your mortgage was under $375k, this defect in theory wouldn't impact you (summing up the 1098s would still put you under the $750k limit).  Obviously, this doesn't work if the mortgage is then sold and you end up with three 1098s, which when summed up may put you above $750k.

Just poor execution all the way around.

[PACBELL]

Once you have your average balance (weighted by months active) you need to overide the values within TurboTax on the "Ded Home Mort" page (Part 1 Home Mortgage Loan Information) within the Forms view (clicking the upper right corner of the application where it says "Forms"

You input your calculated average balance into the "Average balance" line.

The sum of these lines will be your actual yearly average. This value displays a little further down on Line 7 "Average balance of debt acquired after December 15, 2017" (Part 1 - Qualified Loan Limit)

- I'm assuming you wouldn't have this problem for older mortgages, if so it would show up on Line 2.

Additionally, you will also have to Override the average loan balances in your State "Ded Home Mort" worksheet.

Once updating the amount in the state sheet, you will again see the sum of all your balances update on the line "Average balance of all home acquisition debt".

Once you update only thos initial average balances you should not have to change any of the calculations below and you will be able to see the properly calculated "deductible home mortgage interest" amount.

[PACBELL]

Completely agree.  All this stuff I just posted I actually figured out last year and didn't bother posting it because it is a lot and I figured someone at the company would have fixed it by now because they are the "Experts".

All of this is a bigger issue now because of when the tax code was rewritten to reduce the amounts you could deduct.  This 750k limit didn't exist before tax year 2019, I am not sure what it was before. 

Also, again , I am not an expert.  And I do put blame on the politicians that wrote up this mess to begin with.  It doesn't all fall on TurboTax.  The IRS examples are not as clear as they could be, and I don't think they could be.  Look at how huge this one publication is.  That is just a small portion of all these other documents.

If you have to start breaking numbers down into the different ways of calculating an average and you haven't provided one specific equation to use, you are really asking for a mess.

[chanelhurley]

Unfortunately this is their final answer. I had this exact issue last year and they never fixed it. Very frustrating because I refinanced again in 2020 and assumed this would be taken care of, given all the issues last year. Nope. 

[walterfamily1980]

Very frustrating that TurboTax does not seem to have clear entry and correct handling for home mortgages loan interest on home purchased before 2017 that has been refinanced.  Found this form but it will not let me check No