Does the order in which you add mortgage interest (1098) make a difference?

[jyeh74]

This is a weird phenomenon.  I have two 1098 forms.   

Primary loan = $20k interest,  Heloc loan= $1k interest

If I first add the primary loan = $20k interest, then add the Heloc = $1k interest, it will give me a higher refund.

If I first add the Heloc loan= $2k interest, then add the primary loan = $20k interest, it will give me a lesser refund.  It is a few hundred dollars less.

The numbers didn't change.  The way I answered the questions didn't change.  It is merely which loan I enter first vs second.  Is that supposed to matter?  Primary then Heloc is more refund.  Heloc then Primary is less refund.  What gives?

I am not changing the information.  Just the order in which it is entered under Deductions and Credits under Your Home.  Why is this happening?

[zomboo]

The order of entry shouldn't make a difference. Maybe more information than just the interest amounts would help the community figure out what is going on. What prompted you to enter the mortgages two different ways?

[PatriciaV]

Unless your mortgage interest deduction is limited (based on the outstanding mortgage principal), the order of entry for Form 1098 should not change your interest deduction. We do recommend entering the interest in order of the oldest mortgage to the newest, mostly for consistency.

Other considerations that may influence the refund change you are seeing may be seen on Schedule A. If you are able to itemize your deductions, your allowable mortgage interest may be influencing your total deductions.

[jyeh74]

@PatriciaV  Comparing Schedule A and line 8a and 17 in both scenarios.

8a - The number “home mortgage interest and points reported to you in Form 1098.  See instructions if limited”. This number is higher when just entering the primary loan.  Therefore line 17 “total itemized deductions” is higher.

8a - The number “home mortgage internet and points reported to you in Form 1098.  See instructions if limited”.  This number is lower when entering both primary loan + heloc loan.  Therefore line 17 “total itemized deductions” is lower.

So when you add more interest loans from the additional 1098, the refund doesn’t appear to stay flat.  As you add more interest deductions, the home mortgage interest reported actually DECREASES and lowers your itemized deductions.  Doesn’t really make sense to me

[PatriciaV]

It would be helpful to have a TurboTax ".tax2023" file that shows the result you describe for "primary loan + heloc loan."

You can send us a “diagnostic” file that has your “numbers” but not your personal information.  If you would like to do this, please follow these instructions: 

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[zomboo]

Again, the order in which the two 1098's are entered shouldn't make a difference on the interest that is deductible. But in your latest response, you only say that adding the HELOC interest causes the total interest to decrease. This is possible depending on the balance amount of the HELOC, how much was spent on improving the home (acquisition debt), and the interest paid. The percentage of total interest paid on both that is deductible will change. If the HELOC non-acquisition balance is high enough and/or the interest paid on the HELOC is relatively low, your deductible interest will go down.

If you provide balance, interest, and acquisition debt info, the community can better explain what is going on.

[jyeh74]

@zomboo you have an interesting point.  If the HELOC non-acquisition balance is high enough and/or the interest paid on the HELOC is relatively low, your deductible interest will go down.  Why is that?

Heloc was taken out in the second half of 2023 and the balance was around $75k and all for the primary home.  The 1098 showed interest in box 1, was about $1k since it was only a few months.   But why does it make a difference?  Do they look at the ratio of interest paid / Heloc loan took out > some percentage for it to count and therefore for refund to increase?

[zomboo]

Basically, the deductible interest is calculated (total average acquisition debt) / total average loan balance). We can talk about how the average balances are calculated later. Are younsaying the $75K heloc debt was all used to buy, build or substantially improve your home?

[jyeh74]

Correct

[zomboo]

Interesting. When you enter the heloc, does the deductible interest on schedule A go below the deductible interest amount for just the primary loan or is it just less than the combined interest paid on primary and heloc? Is your primary mortgage close to $750K?

[jyeh74]

Primary loan is over $750k.  Which means the interest deduction on the primary loan is already limited.  So when I add the Heloc loan, the refund should not change due to the previous interest on the primary loan already being limited.  Add the $1k from box 1, refund increases.  Then when it is asking for the outstanding principal balance, enter $75k,  refund decreases more than when I just had the primary loan.  

Schedule A (comparing scenario 1 with just the primary loan versus scenario 2 with primary + Heloc loan)

8a - The number “home mortgage interest and points reported to you in Form 1098.  See instructions if limited”.  This number is higher when just entering the primary loan.  Therefore line 17 “total itemized deductions” is higher.

8a - The number “home mortgage internet and points reported to you in Form 1098.  See instructions if limited”.  This number is lower when entering both primary loan + heloc loan.  Therefore line 17 “total itemized deductions” is lower.

So when I add the Heloc loan + the primary loan, once I enter the $75k outstanding principal balance on the Heloc, the line 8a and line 17 on schedule A, DECREASES.  How does having two loans < one loan ?  It's already limited so it should just stay flat, not decrease more.

[zomboo]

The fact the deductible interest is less with both loans than just the primary is more than likely correct. As you already know, If your primary loan was taken out after 2017, the mortgage deduction is limited to the interest paid up to $750K of the mortgage. This limit applies to the total of all your acquisition debt, not to each individually.

So, for example, if you primary mortgage is $800,000 with $12,000 interest then, taken by itself, the deductible interest is $750,000/$800,000 = 0.9375 or 93.8% of the interest paid on the primary = $11,256. When you add the heloc, the total balance goes up but the limit stays the same. So $750,000/$875,000 = 0.85714 or 85.7% of the total interest paid = 0.857 x $13,000 = $11,141. This is because the paid on the heloc is small compared to the interest paid on the primary and your primary interest is taking a bigger hit due to $750,000 limit.

In the example I used $75K for the heloc balance. Since the heloc is only a couple old, you actually need to take the average balance over 12 months, roughly ($75K*2)/12. This will give you a higher deduction so make sure Turbo Tax is using something close to this value as the average. I know it's weird to see your deduction go down but it could also up when you put in you actual value for the primary mortgage.

[jyeh74]

@zomboo fyi both loan balances and their origination dates have been entered into TT.  

I didn’t know they average out the two loans.  I thought once they limit you on the first loan, then whatever loans you add/take out and pay interest, it just doesn’t matter.  I didn’t know it reduces the percentage and affects you more?  Also, I didnt know I am supposed to manually calculate the heloc $75k times the number of months taken out divided by 12 months.  I thought once I enter the origination date from the 1098, TT would calculate it for me?? 

It still doesn’t answer the phenomenon on why the sequence on the loans entered into TT changes the refund.  Primary then Heloc yields a higher refund than Heloc then Primary.

[zomboo]

TT will figure the averages for you. Just keep an eye on them to do it correctly by reviewing the worksheets. TT does have trouble calculating the averages for some unknown reason. Also, I suspect your interest deduction will be more favorable in the years going forward when you have paid interest on the heloc for a full year.

As for the order of entry affecting the outcome, that's one of the many mysteries of using Turbo Tax. They do suggest entering the mortgages in order by origination date but that shouldn't make a difference. You say that entering primary then heloc yields the higher refund, and this is the order TT wants, so pick that one.

[jyeh74]

 Schedule A doesn’t show anything except the combined interest allowed.

Is there a form where I am see how they calculate the averages?