Mortgage Acquisition Interest: Turbo tax appears to use the year's ending balances instead of the average balances to calculate the % deductible. Which is wrong (Pub 936)

[RaifH]

The amount reported on Form 1098 Box 2 is the Outstanding Mortgage Principal as of January 1, 2021. In instances where the taxpayer exceeds the mortgage limit, TurboTax asks for the loan balance as of January 1, 2022 or the date that it was paid off and takes the average of the beginning and ending balances to determine how much mortgage interest is deductible.

The "behind the scenes" work is shown on the Deductible Home Mortgage Interest Worksheet.

[zomboo]

Thanks RaifH for your response. However, it does not address my concern. You are correct that the percentage of acquisition interest is calculated using the average 'total debt' and 'acquisition' balances. However, for mixed-use mortgages, the averages must be calculated by summing the monthly balances and dividing by 12 instead of using the beginning and ending balances and dividing by two.

My issue is that Turbo Tax did not use an average at all for my mixed-use mortgage. Instead, Turbo Tax appears to be dividing the ending 'acquisition debt' by the ending 'total debt' to figure the percentage of deductible interest. In addition, Turbo Tax does not appear to round the percentage to three decimal places as required by Pub 936.

I say 'appear' because this is the only way I can come up with the same value Turbo Tax does.

[RaifH · Accepted solution]

Thank you for clearing it up. As of right now, the Home Mortgage Interest Worksheet defaults to ending balance to the amount used to buy, build or improve the home for those who have used loans funds for other purposes than the home. It does not support any other allocation method of interest. A finalized version of the worksheet will be available February 17, 2022. 

[zomboo]

That's great news! Thank you for taking the time to look into this. It's good to know Turbo Tax is aware of this and working on a fix.

[fmr010]

I do not see a fix for this in recent updates.  Will this be corrected or is a manual workaround required for this tax year?

[zomboo]

There is still hope the issues with the mortgage interest deduction will be fixed. I discussed this with a TurboTax representative at length yesterday who seemed really interested to understand and correct the problems. She called me three times yesterday for for information. I also referred her to a written description I posted in a survey response. I hoping to hear back from her soon.

TurboTax offers the user the option to enter the amount of deducible interest instead of letting TurboTax figure it for you but this option has software bugs. The amount of interest you enter is transferred to Schedule A but deductible points are omitted. In addition, for California residents, the total mortgage debt is treated as non-acquisition debt on the worksheets causing the additional interest adjustment on state Schedule CA (540) to be negative. Again, you can calculate and enter the adjustment if you understand California's adjustment limits but you still have the issue of omitted points on Schedule A.

[cj5]

I know this is an old thread, but as of 2024, this still seems to be a problem. I think the solution is when asked for the end of year mortgage balance, enter the average balance instead. This seems to give the correct results for me, but I'm not sure if it might cause problems elsewhere.