Deduction for Refinanced >$1M Mortgage Not Working

[dbergman]

Hi,

I purchased my home in 2016 and refinanced my mortgage in 2020 (so, I only received one 1098 form in 2021). My current mortgage is slightly over $1M, I did not take any cash out when I refinanced and I file married/joint.

When I input my mortgage information in TurboTax (Premier / online), it does not give me any deduction for my mortgage (i.e., it is implying that the deduction is not large enough to itemize my deductions and it is instead using the standard deduction. 

I'm confident that this is wrong, as:

• Given the 2016 date for my original loan, I should be able to deduct my pro rata interest expense up to the $1M mortgage limit. The full mortgage interest I paid (i.e., what's on my 1098) was ~$27k, and after adjusting for the pro rata impact up to the $1M cap, my deductible interest should be ~$24k
• In addition to the deductible mortgage interest, I have >$10k in state and local tax payments, which combined with the deductible mortgage expense should put my itemized deductions > standard deduction

When I tried to trouble-shoot the problem by changing certain inputs in the 1098 section, I found that when I put $999,999 as the outstanding mortgage principal it gave me the full / correct deduction, but when I increased that by just $2 (i.e., to just over $1M) it gave me no deduction (i.e., the pro rata adjustment that should kick in above the $1M threshold doesn't seem to be working).

For reference, in terms of what I inputted:

• I checked "No" to "Is this the original loan you used to buy your property?"
• I checked "Yes" to "Is this loan a home equity line of credit (HELOC) or a refinance of a previous loan?"
• I checked "No" to "Did you take cash out when you got this loan?"
• I'm asked to enter my loan balance as of January 1, 2022 (which was also modestly over $1M)
• I checked "Yes" to "Do either of these apply to this loan (The original loan was taken out on or before December 15, 2017 and the loan amount has not increased due to a cash out refinance)"
• I'm asked to enter the date I purchased the property secured by the loan (June 2016)

Am I inputting something incorrectly / should I change my responses to any of the questions / prompts? Or, is there a workaround in terms of how I should enter my mortgage info in TurboTax to make the calculation work correctly?

Thanks in advance for any help / guidance, I really appreciate it!

[Mike9241]

i tried out the mortgage interest issue on desktop deluxe using simulated data using a 2017 date for the refi and like you, indicated there was no cash out on the refi. the loan balance at the beginning of the year was $1.2 million and the balance at the end of the year was $1 million. turbotax should have averaged the balances and given me a deduction based on $1 million/ $1.1 million times the interest paid. it failed to average the balances and thus gave me a 100% deduction which is wrong. this appears to definitely be a bug that may have resulted in thousands of taxpayers overstating their mortgage interest deduction. Turbotax are you listenning 

[NCperson]

@Mike9241 - I tried it in the deluxe version (desktop) and it wasn't easy to get it to work, but it did.  I played with it for quite awhile.  Better than 2020, but still not intuitive.  Once of the criticals was to enter the mortgage origination date (box 11) as prior to 12/15/17, even if Form 1098 was blank.  

I also went into Forms mode to be sure all the worksheet items were checked - some of them were blank, as I wasn't asked about them in interview mode.

[dbergman]

Just bumping / following up to see if anyone had any guidance / solution for this issue?

Is this issue not there or fixable (with forms?) in the desktop version? I wanted to see if people thought this would be helpful (or if there's a workaround in the online version) before I tried switching over to try desktop.

Thanks so much!

[NCperson]

@dbergman suggest just calculating the interest yourself (seems you have a good handle on that) and enter that figure in the 1098.  The IRS is not going to care that you report a lesser number as you are taking a deduction less that is reported on the 1098 and you'll have your manual calcuation to support how you came to that conclusion.

you can use the worksheet on page 12 of the attached to get to the exact result. Start with Line 2- you have no 'grandfathered mortgages'.

https://www.irs.gov/pub/irs-pdf/p936.pdf

Assuming a fixed rate loan, you can take the interest and divide by the interest rate to get the 'average mortgage balance'.  it should be similar to a two point average but may give you a better deduction - slightly.  (left side of Page 13)

Alternative: call support and have them walk you through this (they can screen share)

[dbergman]

@NCperson Thanks so much for the reply / advice -- that's helpful and makes sense. 

One follow-up question, though -- even if I adjust the interest amount on the Form 1098 input, unless I adjust the mortgage amount as well (i.e., lowering it to something under $1M), I'm still running into the issue where TurboTax isn't giving me any deduction (i.e., something screwy in the calc is reducing the deduction either to $0, or below the amount that have me itemize deductions).  Can I also adjust / lower the mortgage balance in 1098 (in addition to the interest amount), or would that cause an issue?

Thanks again for the help, I really appreciate it!