Deductible Home Mortgage Interest Worksheet 2020 - Error Avg Balance

[Mikemcna]

Related issue.  IRS Pub 936 describes another method of calculating the average balance which is to take the interest paid and divide by the interest rate (Page 13).  With two mortgages on two homes (one is for sale, already bought the new one, so the first had a mortgage for 12 months and the second for 3.5 months), I presume the IRS would allow the addition of the two calculated amounts to determine whether the $750,000 threshold is exceeded (Pub 936 doesn't seem to address this).  

I cannot see any way in TurboTax to select this calculation option for determining average balances.  There is no input for the interest rate either.  But using this method gives me a balance below $750k so I can use the full amount of interest deduction; using the TT method of summing the straight average balances causes my deduction to be reduced substantially.

Anyone else run into this, or have a solution?

[LinaJ2020]

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.  

Limited interest and points must be entered

Home Mortgage interest being limited

Thank You for your patience. 

Note that your mortgage interest might not change your total tax refund.  It will only change if your total itemized deductions exceeds your standard deduction.  In the TurboTax program, when you enter itemized deductions such as mortgage interest, property taxes, medical expenses, charitable contributions, all of these items are added together. Unless the total of itemized deductions exceeds the standard deduction for your filing status, you would not see any change in tax due or refund.  You should receive a Form 1098 which reflects the mortgage interest, points or property taxes you actually paid. 

[dcworters]

Same problem seems to exist if you bought and sold a house in the same year.   Because of the way the Forms 1098 are created and way TT wants you to input them, it makes it look like my total debt was the COMBINATION of both mortgages, despite at no time did I have that much debt.   Which puts me over the limit, which reduces my deduction.  Is TT going to fix this?

[Sigohigo]

Thank you for your help, however it did not work. I followed step by step like you instructed and still don't get the full interest deduction.

I paid a total of $20,276 in interest shown on 3 1098s and using the solution you provide me only allows for a $15,776 interest deduction on Schedule A.

The primary residence 1098 shows $11,405 interest paid, but this loan was refinanced in October 2020.  The pay off on October 15 was $374,905.  The second 1098 on this same property only has prepaid and one month's mortgage interest paid totaling $1,856 on the new loan of $387,208.  Using the IRS mortgage balancing guide line as I interpret it the average mortgage balance for this property is  $381,056.  This is adding the two mortgages together and then dividing by 2 as per instructions in IRS Pub 936.  It appears to me TT is adding these two mortgages together as though they were on a separate property pushing the mortgage balance above the $750,000 limitation. When I add these two mortgage balance together for the same property and add my second home mortgage, listed below, I gives me a total of $951,743.

Using the wks in IRS Pub 936 I determine the percentage of allowable interest to be 79%.  ($750,000/$951,743=.789) which lines up with the TT figure so I know this is the reason for the bad TT calculation.  IRS Pub 936 indicates that as soon as you assume a new loan through refinance for the same property the previous loan is considered paid and therefore not counted under the $750,000 interest limitation. When you average the two mortgages $381,056 with the $185, 250 mortgage below that total is under the $750,000 limit and allows for the deduction of the entire $20,276 in mortgage interest paid on these two properties.

Another 1098 is $7,014 for a second home purchase in 2012 so it is part of the equation but not part of the problem. Mortgage balance $189,630. I know I have to include this in my mortgage balance averaging for 2020. That balance come out to $185, 250.

Is TT wrong or am I misinterpreting IRS Pub 936?

[EvergreenCOTaxPayer]

TT is just wrong, all it does is keep adding all mortgage balances you input regardless of how many months you had them through the year. The only way to fix it is do the average yourself and override TT or wait and hopefully they fix it considering their one guarantee is the calculations are correct.

[Rosebud99]

I finally got time this evening to apply the TT update from yesterday and attempt to get TT to calculate my Deduct.  Home Mtg Interest properly.  As others have said in the last 18 hours - this is NOT FIXED.

Please contact me directly for more information - the TT Business Analysis and program specs are clearly way  off because  TT is not even asking for enough data points from the end users to make an accurate calculation.

I did get TT to reflect the accurate Deduct. Home Int. in my case,  albeit in a ' kluged' workaround involving doing the average balance calc's for the 5 loan segments on my 1 property in EXCEL.  Then I had to enter each loan segment's  average into each loan's UI as the "Outstanding Mortgage Principal" box 2 and voila, the amount of deductible  interest within TT is now right. 

My hesitancy to file it this way is that the 1098 I received from the lenders does not match the values I entered into  TT.  Source file matching by a third party could create red flags and that is one reason I have used TT for years, to avoid such situations.  While I will defend my number as 100% accurate - it is not specifically the data that I received from the lender.  

So please have your Business Analyst contact me or any one of the other numerous end users on the forum that are having the same problem.  We are dying out here for some feedback that is more concrete that we are working on it.  Thanks for listening.

[Rosebud99]

Attention TT Forum Moderator-

My latest  post a few minutes ago was for your attention. The header I inserted into the subject line was stripped off when the post went live.  

Again - Please have your team members contact me for more specifics that I care to go into on this forum.  While complicated - this isn't rocket science or brain surgery - just need to make sure your team has the facts that are causing your user community to be pulling out our hair. 

[JamesG1]

Some TurboTax customers are experiencing an issue with their home mortgage average balance. This can cause the home mortgage interest to be incorrectly limited.  This may be affecting your tax return.

Please sign up for email notifications when an update related to this issue is available here.

See also this TurboTax Help.

[cb641]

I'll echo the other recent post - this is not fixed. If you refinanced, and follow the new instructions (combine the interest and enter only one 1098), the interest amount is still not correct unless your refinanced loan is for the exact amount of the previous loan's payoff. If you financed the closing costs, then the method described by TT will deduct too much interest. And if you try to deduct any points, then it throws everything off.

If you have a second home loan, then it is all screwed up.

I could go into detail, but I'm not. TT - do your research and do your job. As someone said in an earlier post, this ain't rocket science. All you need to do is mimic the calculations as shown in Pub 936, which specifically says that you cannot use the first and last balance method if you prepaid more than 1 month's principal during the year. This includes refinancing.

It is hard to believe that these IRS rules went into effect in 2017, yet it seems that TT never fixed it.

[cb641]

I just noticed this too - the Ded Home Mort worksheet is incorrect. It does not match the IRS Pub 936 version. It excludes any interest that is not reported on a 1098.

Per IRS Instructions (Pub 936) - 

Line 13

If you make payments to a financial institution, or to a person whose business is making loans, you should get Form 1098 or a similar statement from the lender. This form will show the amount of interest to enter on line 13. Also include on this line any other interest payments made on debts secured by a qualified home for which you didn't receive a Form 1098. Don't include points or mortgage insurance premiums on this line.

[cb641]

For what it’s worth, here’s what I did, based on my reading of Pub 936.

Loan 1 originated in 2015 < 1,000,000

Loan 2 originated in late 2020, and refinanced Loan 1 

Loan 3 originated in late 2020 and is for an RV, which qualifies as a 2nd home, and has no 1098.

Loans 2 & 3 total more than $750,000

From Pub 936 Part 1 - If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages… If one or more of your mortgages doesn’t fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct. 

Loan 1 fell into the 2nd category listed, so the interest is 100% deductible. For loans 2 & 3, I have to go to Part II. If all you have is the refinanced loan, then the loan limit is the higher of $750,000 or the amount that was used to pay off the original loan (not including closing costs and points).

Now for Average Balance. First, Loan 1 does not fall into the Part II category, so that loan is not in the calculation, and I did not average the balances. For Loans 2 & 3, I simply added the loan amounts together and divided that amount into 750,000 (750000 / Total Post 2017 Loan Amount) That gave me a decimal number that I then multiplied by the interest amount of loans 2 & 3, which was then added to the interest for loan 1 to give me my total interest deduction allowed.

Pub 936 Part II page 13 - 

You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. The following are methods you can use to figure your average mortgage balances. 

Average Mortgage Balance 

You have to figure the average balance of each mortgage to determine your qualified loan limit. You need these amounts to complete lines 1, 2, 7, and 12 of Table 1. You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. The following are methods you can use to figure your average mortgage balances. 

Average of first and last balance method. You can use this method if all the following apply. 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.) 

TT is using the first and last balance method for all mortgage amounts, which is incorrect. Table 1 (Pub 936) would be applicable if all of my mortgages were subject to the rules in Part II.

To enter this into TT, I added the 2 1098s and the non-1098 loan, then in Schedule A, I overrode the calculated values on lines 8a and 8b. 

[HoJo1982]

Since this is a known issue, why isn't there an alert in the software to let customers know they shouldn't file yet as there is an error for people who refinanced? People can start filing in a few days and the lack of clarity from Turbo Tax is troubling. 

[EvergreenCOTaxPayer]

There isn't some. Any customer who refinanced or sold/bought a home is having an issue. Which I would guess is a large number considering the low rates. So this isn't a minor issue that "some" users have.

[dhagen]

I agree completely that TT's failure to correctly handle refinanced mortgages is a major problem in their software that many, many users with a Schedule A will encounter.

When I combined my two 1098's into one "fake" 1098, per TT's revised instructions in EasyStep, I did finally get the proper mortgage interest deduction placed on my Schedule A. But if I tried to get TT to calculate my amortized points on the second loan, I lost half of my interest deduction. (Thus I had to calculate my deductible points manually and enter them manually on Schedule A.)

But I will not be willing to file my return electronically if TT does not fix both the mortgage interest and points calculations. 

Could the IRS decide to increase audits of TT returns, knowing that the software creates incorrect results and that TT clients are using kluges to work around TT's erroneous software?

Should I resort to printing the return and mailing it?

Do I buy another program and start over from scratch?

TT needs to publicly address these issues and their recommendations by March 1 at the latest! 

[LinaJ2020]

Here is the workaround:

If you have more than two 1098's forms, I will recommend you to combine all 1098 forms and enter as one.   I am attaching a TurboTax link for the instructions how to claim your mortgage interests.  Click here:

Multiple Form 1098s

For tax years prior to 2018, your mortgage interest 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). Beginning in 2018, this limit is lowered to $750,000.  For more information about the mortgage interest deductions, click here: Mortgage Interest deduction