Changing the mortgage PRINCIPAL balance (not the interest paid) changes the tax owed - WHY??

Forum|Forum|11 months ago
April 15, 2025
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I have a $830K mortgage on a home purchased in 2011. So it's grandfathered above the $750K limit which began in late 2017. I'm married filing separately which means I can ONLY itemize deductions.

Weird things happen when I change the "principal balance" (line 2/box2) of the mortgage data entry. If I enter the $830K from the start of the year (per the 1098) and change nothing else, I get FED taxes owed of about $19.7K. If I lower the principal amount to around $500K the FED taxes drop to $16,055. And they stay that way if I take it down to $1. If I drop the principal literally to 0, the fed taxes change to a whopping $25.7K.

This seems kinda screwy. Why does the principal balance affect Fed (and state) taxes owed, if the entered mortgage interest itself has not even changed??

Mike9241

if you change the balance to zero, none of the interest would be deductible show up on schedule A. as MFS your debt limit is only $500K not $1 million

bagofchipsAuthor

Thx for the fast reply, on Apr 14 nearing midnight west coast, no less, one day to go. Yeah changing it to zero was obviously just an edge case to see how the thing was working. I forgot about how (of course) the MFS would split-allocate principal balance and therefore the interest so that mostly explains. Though, now here's what's weird, it seems to be "giving" me about 60% (not 50%) of the mortgage interest. ($16K of $26.7K) when I look at the interest on Sched A vs the interest worksheet. (Sounds like I'll be buying audit defense.)

Mike9241

the proration is 500/830 which is the 60% however, if you been paying down the principal you deduction could actually be 500 divided by the average balance for the year.