Many homeowners refinanced to a sub-3% mortgage when interest rates were low a couple of years ago. The mortgage interest most people pay isn’t large enough to make them itemize their deductions. They just take the standard deduction. Those who can still deduct their mortgage interest tend to have a large mortgage.
Limit on Deduction
The Tax Cuts and Jobs Act of 2017 reduced the limit on the mortgage balance on which you can deduct the mortgage interest from $1 million to $750,000. The lower limit applies to homes acquired after December 15, 2017. The large increase in home prices in recent years makes recently bought homes in high-price areas more likely to exceed the $750,000 limit.
However, lenders still report 100% of the mortgage interest paid on the 1098 form without adjusting for either the old $1 million limit or the new $750,000 limit. If your mortgage balance is over the limit, deducting the mortgage interest is more complicated than just using the number from the 1098 form.
It isn’t simply multiplying $750,000 by your interest rate either when your mortgage balance started above $750,000 and ended below $750,000 or when you took out the loan in the middle of the year.
Average Mortgage Balance
A key concept is your average mortgage balance during the year. When your average mortgage balance exceeds the limit, your deductible mortgage interest is:
Loan Limit / Average Mortgage Balance * Actual Mortage Interest Paid
If you paid $30,000 in mortgage interest on an average mortgage balance of $1,000,000 and you’re subject to the $750,000 limit, your deductible mortgage interest is pro-rated to:
$750,000 / $1,000,000 * $30,000 = $22,500
IRS Publication 936 gives several ways to calculate your average mortgage balance:
- Average of first and last balance method
- Interest paid divided by interest rate method
- Mortgage statements method
The first method is simpler and it gives you a slightly larger deduction but you can use it only if you didn’t prepay more than one month’s principal during the year.
Here’s how it works in TurboTax, H&R Block, and FreeTaxUSA tax software.
TurboTax
The screenshots below are taken from TurboTax Deluxe downloaded software. The TurboTax downloaded software is both less expensive and more powerful than TurboTax online software. If you haven’t paid for your TurboTax online filing yet, you can buy TurboTax download from Amazon, Costco, Walmart, and many other places and switch from TurboTax online to TurboTax download (see instructions for how to make the switch from TurboTax).

Find the mortgage interest topic in the Your Home section under Federal Taxes -> Deduction & Credits.
Form 1098

When it asks you to enter information from your 1098 form, enter the numbers as they appear on your form. If Box 2 is blank on your 1098, enter the mortgage balance at the beginning of the year (or your beginning loan balance if you took out the loan during the year).

You get to this summary after you answer a few more questions. Click on Done but you’re not done yet.
Purchase Date and Ending Balance

The purchase date of the home determines whether you have a $1 million limit or a $750,000 limit for the mortgage interest deduction. If this mortgage was from a refinance, you still enter the date when you originally bought the home.

TurboTax asks for the balance as of January 1 of the following year because it uses the “average of first and last balance method” to calculate your average mortgage balance for the year. This works when you didn’t make extra principal payments during the year.

TurboTax calculates a deduction using the “average of first and last balance method” but you can’t legally use that method if you prepaid more than one month’s principal during the year. You must calculate your average mortgage balance in a different way and give the pro-rated deductible mortgage interest to TurboTax.
If You Prepaid Principal
If you had the mortgage for all 12 months and your interest rate didn’t change during the year, which is the case for most people with a fixed-rate mortgage, you can use the “interest paid divided by interest rate method” to calculate your average mortgage balance. Suppose you paid $30,000 in mortgage interest and your rate is 2.875%, your average mortgage balance is:
$30,000 / 0.02875 = $1,043,478
Your deductible mortgage interest is:
$750,000 / $1,043,478 * $30,000 = $21,562
If your interest changed during the year, you’re better off using the “mortgage statements method.” Download the monthly statements from your lender. Add up your balance from January to December and divide by 12. That’s your average mortgage balance during the year. Use that number to calculate your pro-rated deductible mortgage interest and give it to TurboTax:
Loan Limit / Average Mortgage Balance * Actual Mortage Interest Paid
Verify on Schedule A
To confirm how much mortgage interest deduction you’re getting, click on Forms on the top right and find Schedule A in the list of forms in the left panel.

Scroll down to the middle and find Line 8. You’ll see the mortgage interest deduction.
H&R Block
Mortgage interest deduction works differently in the H&R Block software.

Find “Home Mortgage Interest (Form 1098)” under Federal -> Deductions.
1098 Entries

H&R Block offers a Home Mortgage Assistant. Click on that.

After saying we have a 1098 form and entering the name of the lender, we come to this form to enter the numbers on the 1098 form.
Wrong!

After answering some more questions about points and mortgage insurance premiums, which we don’t have, H&R Block says we can deduct 100% of the mortgage interest paid.
This can’t be right. We entered a beginning balance above $1 million on the 1098 form. H&R Block didn’t ask for the home purchase date to see whether the limit is $1 million or $750,000. It didn’t ask for the ending balance or the interest rate to calculate the average mortgage balance. H&R Block just uses the interest paid number from the 1098 form as if the loan limit doesn’t exist.
Calculate It Yourself

We go back to the 1098 entries to see if we missed anything. See there’s a Learn More link next to Box 2? What’s that?

There’s our answer. It says at the end:
If a limit applies to you, visit www.irs.gov and see Publication 936 Home Mortgage Interest Deduction. You’ll need to use the Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest for the Current Year to calculate your deductible interest and limit your entry to that amount.
Translation: You’re on your own when your mortgage is over $750,000. Calculate it yourself and put the result here.
Granted that TurboTax doesn’t cover all situations but at least it makes an attempt to cover the most common scenario (only regular payments without extra principal payments). H&R Block just washes its hands and puts it all on you when your mortgage is above the limit. That’s lazy. Although only a small percentage of people deduct their mortgage interest now, among those who can still deduct, many have a mortgage above the limit.
It’s bad enough that the software doesn’t do the necessary work to help you calculate, but it’s inexcusable that it doesn’t warn you more conspicuously you’re on your own. Many people won’t notice the information hidden behind a subtle Learn More link.
So what do you do if you’re using the H&R Block software? Do what TurboTax does. First, calculate your average mortgage balance:
- If you didn’t prepay more than one month’s principal, get the beginning balance and the ending balance. Take an average.
- If you made extra principal payments and your interest rate didn’t change, divide the interest paid by your interest rate.
Then, calculate your deductible mortgage interest:
Loan Limit / Average Mortgage Balance * Actual Mortage Interest Paid
FreeTaxUSA
I also checked how the online tax software FreeTaxUSA does it.

Similar to H&R Block, FreeTaxUSA puts a small question mark link next to the mortgage interest entry. Clicking on the question mark opens a pop-up window, which says toward the end:
If your debt is higher than the limits, use Publication 936 to figure out your deductible home mortgage interest amount and reduce the mortgage interest you enter accordingly.
You’re also on your own when you use FreeTaxUSA. It also doesn’t tell you clearly that you must do some extra work.
***
H&R Block tax software is less expensive than TurboTax but this isn’t the only case where it punts and asks you to read the IRS instructions and come back with the answer yourself. See another example in How to Enter 2022 Foreign Tax Credit Form 1116 in H&R Block. You really have to know where it cuts corners when you use H&R Block software. It works well only when those cut corners don’t affect you. The same also applies to FreeTaxUSA.
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Brian Kansella says
Harry,
Thanks for all you do. I recently started reading everything I can find you’ve written on taxes. I want to try doing my own this year or next. I had begun to lean toward H&R Block’s download software, but after reading this post I’m thinking maybe I should start with TurboTax. Would you have a preference if you were trying to do your own taxes for the first time?
Thanks!
Harry Sit says
If your taxes are simple enough, either one works. TurboTax covers more corner cases than H&R Block. It doesn’t matter if those corner cases don’t apply to you. Sometimes being more thorough can be more confusing when the software asks questions you don’t know whether you should pay attention to or ignore. Since you’re doing it for the first time, I would suggest TurboTax only because it’s easier to find answers online when you’re not sure of something.