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How to enter a different average mortgage balance than what TurboTax calculates?

Forum|Forum|4 years ago
February 26, 2022
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We moved this year from one home to another. The first home has an active mortgage originated prior to 2017 and hasn't yet been sold. The new home is financed with a new (much larger) mortgage starting September 2021. It seems that TT uses the Average of first and last balance method to calculate the Average Mortgage Balance. This results in a big reduction of my deductions as if I am being penalized for having taken out a new mortgage.

However, given that my new mortgage is only part-year, the Interest paid divided by Interest rate method is more appropriate, which would appropriately calculate my deductions as the law intends. I have gone through this on the Mortgage Interest Deduction Worksheet in Pub 936.

My question is how can I override TT to do this calculation correctly? None of the TT steps/questions seem to allow this. I can't just omit a 1098 form and "decide not to take a deduction" right? I know there are lots of posts about having two mortgages from different limitation timeframes, but none of the answers seem to address this particular question of how to deal with it in the TT? Please correct me if I am wrong! Thank you!

Best answer by RaifH

No, you cannot omit the second Form 1098. If you want to take the mortgage interest deduction as an itemized deduction, you must include all the mortgage interest you paid.

You can manually calculate the Outstanding Mortgage Balance to report for your second 1098 on the new home using the interest rate method by dividing the interest paid reported in box 1 by the lowest interest rate you paid on this home during 2021. You can use this calculated amount as the Box 2 Outstanding Mortgage Balance rather than what is reported on Form 1098.

If the system asks for the balance of your loan on January 1, 2022, you will want to report the same number you calculated since the system will take the average of these two numbers as your Outstanding Mortgage Balance.

TurboTax is also working on finalizing the worksheet that would calculate the balance using the average mortgage balance. Once corrected, it should give an answer similar to the interest rate method, because the months you did not have the mortgage would count as $0. You can sign up for notifications when it will be ready here.

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RaifHAnswer

No, you cannot omit the second Form 1098. If you want to take the mortgage interest deduction as an itemized deduction, you must include all the mortgage interest you paid.

You can manually calculate the Outstanding Mortgage Balance to report for your second 1098 on the new home using the interest rate method by dividing the interest paid reported in box 1 by the lowest interest rate you paid on this home during 2021. You can use this calculated amount as the Box 2 Outstanding Mortgage Balance rather than what is reported on Form 1098.

If the system asks for the balance of your loan on January 1, 2022, you will want to report the same number you calculated since the system will take the average of these two numbers as your Outstanding Mortgage Balance.

TurboTax is also working on finalizing the worksheet that would calculate the balance using the average mortgage balance. Once corrected, it should give an answer similar to the interest rate method, because the months you did not have the mortgage would count as $0. You can sign up for notifications when it will be ready here.

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hyungdoAuthor

Thank you so much @RaifH. This calculates the deductible amount as intended in the Mortgage interest deduction worksheet!

From the perspective of the intent of the IRS law though, I am puzzled as to why adding a mortgage would result in a reduction of the total deductible amount. I understand why the worksheet calculates it that way, but I would imagine that increasing mortgage interest paid would eventually result in an increase of the deductible amount or no change if you hit the limit...

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RaifH

When the average balance is calculated correctly and you are paying the same interest rate on all your loans, the mortgage interest limit will not reduce the mortgage deduction, but it would keep it at the same amount as if your mortgage was for $750,000.

On the other hand, if you have a high-interest rate mortgage that you refinance out of to a lower rate and the total balances add up to over $750,000, you may see a lower overall mortgage deduction than you would have prior to adding the new, lower-rate mortgage. As for why that is or what the intent of it is, I'm not really qualified to speak on that.

With that in mind, I should correct myself from earlier and say that you can actually exclude your home mortgage interest from being deductible and you would not have to include it. This is normally only done to use the interest as an expense somewhere else and it would require IRS permission to make the mortgage interest an allowable deduction again in future years.

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akenis

The method you suggested says:

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.

If your lender can give you your average balance for the year, you can use that amount.

So divide by 1 since Loan was only secured 1 month.

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akenclark

I have a number I want to use for the average balance but do not see how to enter it. Line G-7 of the Home Interest Worksheet (labeled Average Loan Balance) will not accept typed input nor does it display a computed number