Understanding Excess Home Mortgage Interest for Individual federal Schedule A in ProConnect Tax

• The excess mortgage rules apply when the taxpayer's home acquisition debt exceeds $1,000,000 ($500,000 if Married Filing Separately) or the taxpayer's home equity debt exceeds $100,000 ($50,000 if Married Filing Separately).
  • The existence of grandfather debt (pre-1987) affects the determination of excess home acquisition debt.
• When the taxpayer has mortgage interest of $50,000 or more, a diagnostic is currently issued informing the preparer that the home mortgage limitations may apply and that amounts may need to be manually limited.
  • Input fields are provided at the bottom of the Schedule A screen for calculating amounts.
    • Click on the Check Return tab at the top of the screen
    • Under Forms, select Worksheets
• For information regarding a refinanced home, see Entering a Refinance in the Excess Mortgage Interest section in the Itemized Deductions screen.
• For more information on home mortgage interest rules, see Publication 936, Part II, Limits on Home Mortgage Interest Deduction.

• When the taxpayer is subject to excess mortgage limitations, points are subject to limitation as well.
  • The percentage on line 11 of the Worksheet to Figure Qualified Loan Limit and Deductible Home Mortgage Interest should be applied to points as well.
  • When points are entered in the excess mortgage input section, a worksheet prints out showing the calculation of deductible and excess points.
• Calculating amortized points as part of deductions:
  1. To enter amortized points:
     1. From the left of the screen select Deductions and then Depreciation.
     2. Click on the Form field and choose Schedule A (points) from the dropdown menu.
  2. The otherwise deductible amount of points is multiplied by the ratio on line 11 of the Pub 936 worksheet.
  3. The result is included on Schedule A, line 12.
  4. An informational diagnostic is generated informing the user that the amortized points were subjected to the percentage.
  5. If the amounts don't flow correctly:
     1. Click on Itemized Deductions to the left of the screen
     2. Under the worksheet Excess Mortgage Interest, if an override is entered in the Average Balance field, the amounts won't flow correctly. Remove any override in that field.

1. From the left of the screen, select Deductions and choose Itemized Deductions (Sch A).
2. From the top of the screen, select the Interest section.
3. In the Excess Mortgage Interest section, enter information for up to 4 loans.
   • The input within the program is currently limited to 4 loans. To input more than 4 loans, see Schedule A Excess Home Mortgage Interest with More Than Four Loans below.
4. Check the Worksheets only checkbox to have ProConnect Tax calculate the Excess Mortgage Worksheet for the amounts of allowed deductible interest and expense and NOT carry the amounts to the respective forms or schedules.
5. To enter a payoff, include any principal paid before the payoff, plus the entire payoff amount, in the field Total principal paid.
6. The field Lump sum principal payment (if paid off) should include only the payoff amount.
   • In a payoff situation, ProConnect Tax prints the payoff amount as the ending balance, if entered properly. The formula to compute the average balance of a loan is [(beginning balance + ending balance)/2 x the number of months outstanding/12].

Schedule A Excess Home Mortgage Interest with More Than Four Loans

You should start off by printing the Excess Mortgage Worksheet to manually calculate all loans (including the additional loans). From there:

1. Go to Input Return ⮕ Deductions ⮕ Itemized Deductions. (Sch A)
2. Scroll down to the Interest section.
3. Report the total of all loans in the field Home Mortgage interest & Points on Form 1098 [A].

It is important to note that the program does not generate any additional columns in excess of four mortgage loans.

Follow these steps to enter information to calculate the excess mortgage:

1. Go to the Input Return tab.
2. From the left of the screen, select Deductions and choose Itemized Deductions (Sch A).
3. From the top of the screen, select Interest.
4. Scroll down to the Excess Mortgage Interest section.
5. Enter the following fields:
   • Lender's name
   • Form (Click on arrow to select from list)
   • Activity name or number
   • 1=taxpayer, 2=spouse, blank=joint
   • Interest paid
   • Total principal paid
6. Locate the applicable Home Acquisition Debt (proceeds used to buy, build or improve home) or Home Equity Debt (proceeds not used to buy, build or improve home) subsection.
   • Home Acquisition Debt is used when the loan was used for purchase/improvement of home.
   • Home Equity Debt is used when the loan was used for other things. If you use this subsection, enter the Percentage that benefits the home (.xxxx).
7. Enter the Beginning of year in the applicable section.

Mortgage-related deductions entered iwithin the Excess Mortgage Interest section shouldn't be entered elsewhere. If using this input section, remove mortgage-related deductions from the regular interest section of this screen, from the Business Use of Home (8829) screen, and from any vacation homes or owner-occupied rentals entered in on the Rental and Royalty Income (Sch E) screen.

What is the Excess Mortgage worksheet?

The Excess Mortgage worksheet in the Individual module is based off the IRS Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest for the Current Year from Pub 936. 

This worksheet is calculated using the amounts you enter in the Excess Mortgage Interest section.

1. From the left of the screen, select the Itemized Deductions section
2. From the top of the screen, select the Interest section
3. Under Excess Mortgage Interest, complete all of the applicable input fields

How does ProConnect Tax calculate the Excess Mortgage worksheet?

I. Average Balance & Allocated Interest Worksheet

First, the program will complete the Average Balance & Allocated Interest Worksheet for each loan entered under Excess Mortgage Interest.

II. Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage for 2023 (IRS Pub 936)

Once the program calculates the client's Average Balance & Allocated Interest Worksheet, it calculates the Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage for 2023 (IRS Pub 936).

Part I - Qualified Loan Limit

Part II - Deductible Home Mortgage Interest

III. Allocation of Interest to Type of Debt and Forms/Schedules

This section shows the total interest, excess home mortgage interest (HMI), and interest deductible as HMI, as well as where you reported the amounts.

IV. Allocation of Interest to Type of Debt and Forms/Schedules

This section shows the total points, excess points, and deductible points, as well as where you reported the amounts.

This section explains why ProConnect Tax overstates a loan on a refinanced home when calculating a taxpayer's average mortgage balance.

The overstatement occurs when:

1. Excess Mortgage Interest inputs are added to the Itemized Deductions screen to calculate the average mortgage balance on a refinance.
2. The program totals the loans, causing it to overstate a loan on a refinanced home.

How ProConnect Tax calculates average mortgage balance

The program calculates the average mortgage balance on more than one loan by using the "Average of first and last balance method."

• It averages the first loan amount, averages the second loan amount, and then totals these loans to arrive at the average mortgage balance.
• The total appears in the "Worksheet to Figure Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year (IRS Pub 936)."

Using the "interest paid divided by interest rate" method

However, with a refinance or in a situation where a home was sold and a new home purchased, the "Average of first and last balance" method won't correctly average the mortgages.

• In this situation, the "Interest paid divided by interest rate method" should be used.
  • The calculation divides the interest paid in the year by the lowest interest rate for the year, resulting in the average balance for the year for loan one.
• Do the same for each additional loan.
  • Enter each amount in the respective "Average balance [Override]" field.
  • The program will total these amounts and enter them in the worksheet.