Turbotax incorrectly calculated my average mortgage balance on Form 1098 in 2022, causing a lower HMID. I re-entered the correct information but no change. How to fix?

[menoliketax]

A tax professional pointed out to me that my HMID seemed too low for 2022. 2022 was the year that we originated the mortgage, so the mortgage balance for the first ~5 months of the year was $0. This brings the average down quite a bit, and therefore should increase the HMID. So I went into TurboTax to try to amend my 2022 return. It had me re-enter the information from my Mortgage 1098 form, which includes interest paid, outstanding balance, and date of origination. I would assume this information is sufficient to calculate the correct HMID, as the origination date of in May 2022 should suggest that our mortgage balance was $0 before then, and therefore the *average* balance should be significantly lower than the full balance of the mortgage. However, this was the exact same information I entered when doing the original tax return, and therefore it does not lead to an increased refund. Turbox also doesn't seem to allow me to go in and manually increase my deduction. Any ideas on how I can fix this and file an amended return?

[rjs]

You can't say you had a zero mortgage balance when you didn't have a mortgage. The Average Mortgage Balance is calculated only over the period of time that the mortgage was secured by your home. The mortgage was not secured by your home prior to when the mortgage was originated, so you cannot include the time prior to origination of the mortgage.

For details on how to calculate the home mortgage interest deduction see IRS Publication 936, Home Mortgage Interest Deduction (for 2022). The instructions for calculating the average mortgage balance are on page 12.

[menoliketax]

Thanks for the pointers! I read though the calculations on Page 12 and am a bit confused still. I think the relevant part is:

"Statements provided by your lender. If you receive monthly statements showing the closing
balance or the average balance for the month, you can use either to figure your average balance for the year. You can treat the balance as zero for any month the mortgage wasn't secured by your qualified home.
For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year."

I don't totally follow what this means. How should I interpret the above in the context of months where I didn't have a mortgage?

[rjs]

You ignore months that you didn't have a mortgage. They don't enter into the calculation at all. You can't count them. You calculate the average balance only for the months that you did have a mortgage.

The section that you quoted from Publication 936 applies to using monthly statements from the lender that show the balance each month. Did you get such statements? In your original question you only mentioned a 1098, not monthly statements. If you did not get monthly statements from the lender showing the balance each month, then that whole section under the heading "Statements provided by your lender" does not apply to you. You just ignore it completely.

If you did get monthly statements showing the balance, when the publication says "You can treat the balance as zero for any month the mortgage wasn't secured by your qualified home," it means months that you did have a mortgage, but the mortgage was not secured by your home. But there are no such months. No mortgage lender would give you a mortgage loan without it being secured by your home. So you just ignore that sentence. There are no months for which you can treat the balance as zero.

(I suppose that sentence is there because a private lender, an individual person, might enter into a mortgage that is not secured. But no bank or mortgage company ever would.)

[menoliketax]

Thanks again for your thorough reply! I did get monthly statements. I think your interpretation of that section makes sense, though in my opinion, the instructions aren't particularly clear about how to handle the calculation when you had the mortgage for less than 12 months of the year. I guess it's this section here that says: "For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year." If I'm reading this correctly, in my case, "the number of months the home secured by that mortgage was a qualified home during the year" isn't 12, but rather ~7 or so. 

And if I were to use the average of first and last balance method, the first step of the instructions say to: "Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally, January 1)". In my case, that wouldn't be January 1, but rather sometime in May.

So it seems like with either method I am not able to count the months where I did not have a mortgage. Let me know if you disagree with anything in that assessment. 

Thank you!

[Mike9241]

Yes, like in many other cases neither the instructions nor official pronounceent give an example of certain common situations

forgot if i gave an example in previous reply

this is an example of how i look at the law post 2018 (the only difference is pre-2018 the cap was $1M)

 say 1/1 and 12/31 balance is $1M on both dates and you pay $60K (6%) in interest. since the cap is $750K only 75% or $45K is deductible. say your balance on 5/1 and 12/31 was $1M. at 6% you would pay $40K in interest. again 75% would deductible or $30K

$60K for the full year times 8 (months loan outstanding) divided by 12 is $40K and 75% of that is $30K

to me the results are logical

you do have the option of consulting a pro so see what the results would be if monthly averages were you. But then there's the cost vs any tax benefit.  

perhaps others on this forum will chip in with their opinions.  

[menoliketax]

So I've done some more digging here and would love to get the opinion of all of your helpful people. I'm thinking that I might be able to get a larger deduction by using the "Average of first and last balance method". Here's my reasoning. Please try to poke holes in it!

The instructions for the average of the first and last balance method state that you can use that method if "you didn't borrow any new amounts on the mortgage during the year. (This doesn't include borrowing the original mortgage amount)". So based on the parenthetical, I can use this method even though the mortgage originated that same year. 

Later the instructions tell you "Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally, January 1)". This is phrased quite ambiguously. If you read it with the emphasis on "first day of the year that the mortgage was secured ..." then it would be the first day of 2022, which was January 1st, when the mortgage balance was $0. If you read it with the emphasis on the "first day of the year that the mortgage was secured ...", then it would be the date in May that we secured the mortgage.  

Thoughts? 

[rjs]

Okay, here are my thoughts.

I agree that you can use the average of first and last balance method. Your interpretation of the first requirement is correct.

But the phrase "the first day of the year that the mortgage was secured by your qualified home" has only one possible meaning. It is not ambiguous at all. It clearly means the date that the mortgage was originated, which was in May. Your alternative interpretation is an impossible stretch. By saying it's January 1 you are essentially putting a period after "the first day of the year" and deleting or ignoring "that the mortgage was secured by your qualified home." Your reading of the instructions for line 1 is clearly colored by your obvious burning desire to include some zeros in the average. But you can't do that. You never had a mortgage with a zero balance. You don't get to count the days or months before you had a mortgage.

You may also be putting too much weight on a vague comment by "a tax professional" who apparently did not prepare your 2022 tax return and probably did not do a detailed investigation of the facts. "Seemed too low" sounds like an offhand comment after a quick glance, not a professional conclusion based on a careful study.