Why does adding a 1098 from another mortgage bank lower my deductible interest? Is this a bug?

[saqibali999]

I'm a long-time homeowner. In 2020, I refinanced my home. Due to the refinance, and switching mortgage banks, I made mortgage payments to three different banks in 2020:

• Bank A (original mortgager): 8 monthly mortgage payments, January - August
• Bank B (temporary mortgager): 1 mortgage payment, October
• Bank C (new mortgager): 2 monthly mortgage payments, November - December

I have received 1098 statements from all three mortgage banks. Now I'm doing my 2020 taxes through TurboTax Online.

When I enter the 1098s for Banks A and C only, it shows me this summary:

Notice All Deductible interest is $17,446

After that, I enter the 1098 for Bank B. This is the new summary it shows me:

Notice that All Deductible interest has now dropped to $8,908.How is this possible?  Just entering the 1098 for Bank B increased my tax bill by thousands of dollar because it switched me from itemized to standard deduction!

I don't understand how reporting that I made another mortgage payment (of which most was interest) caused my deductible interest to drop precipitously rather than increase.

Is this a bug in TurboTax?

[Cynthiad66 · Accepted solution]

Try this.  

Don't see line 8a on 1098 

If there is a refi and there was an outstanding mortgage principal listed in both of them on Line 2 on the 1098. When you do put an outstanding balance in both forms, then the program adds them together and if that number is greater than $750k, then it puts you in the category to "limit interest". To get that to go away, you need to go back to the deductions section and click on "edit" mortgage interest statement. Change the line 2 of the mortgage that you no longer owe on (like the one that you refinanced and paid off) to a 0 (zero) because you have refinanced out of that loan and no longer have an "outstanding mortgage principal". Once you change one of them to zero (the one that was paid off by the refinance) then it should no longer pop up with that error at the end when you go to file. 

[saqibali999]

Yes. That worked! Thanks.

But it also means there is a bug in TurboTax.
And the only workaround for that bug is for me to lie. So this is a big big problem.

[LinaJ2020 · Accepted solution]

The issue has been submitted and is currently under investigation.  Please click on the following link and sign up for an email notification when it's fixed.  

Home Mortgage interest being limited

Thank You for your patience. 

Your deduction is generally limited if all mortgages used to buy, construct, or improve your first home (and second home if applicable) total more than $1 million ($500,000 if you use married filing separately status) for tax years prior to 2018. Beginning in 2018, this limit is lowered to $750,000. Mortgages that existed as of December 14, 2017 will continue to receive the same tax treatment as under the old rules.

For tax years before 2018, you can also generally deduct interest on home equity debt of up to $100,000 ($50,000 if you're married and file separately) regardless of how you use the loan proceeds.  For details and learn more, click here: Home mortgage interest limitation

[carmene19]

This happened to me too. I refinanced a mortgage. When I enter the second mortgage 1098 info it increases rather than decreases my tax liability.

[DaveF1006]

It is because you entered loan balances in each 1098. For Carmene's solution, combine the two 1098's.

1. Enter the original loan balance in the original 1098 in Box 2. Combine the mortgage interest amounts in Box 1. loan origination date should be the date that is on the refinanced 1098.

For saqibali999, combine the three 1098's. Enter the original loan balance in the original 1098 in Box 2 and combine the mortgage interest in Box 1. Use the loan origination date that is in the refinanced 1098.

if you do it in this manner, you won't combine all the mortgages and the original mortgage amount will stay the same. Keep in mind, your property tax deduction is limited to $10K because of the Tax cuts jobs Act in 2017.