Claiming Mortgage Interest Credit On Your Tax Return

If you think that there are no more tax credit for first time home buyer’s credit, think again!!

One tax credit that has been around since 1984 but has been overlooked by most home buyer is the mortgage credit certificate program or simply called MCC.

However, this is not a program administered by the IRS but a program supported by your local agencies (county, city or a state). The credit is designed to off-set the high cost of home ownership by providing financial assistance to low-to-moderate income home buyers  own a home. If you qualify, you can take the credit each year for part of the home mortgage interest you pay. In some cases, the credit can be taken for up to the life of the mortgage depending on the agency’s program.

For you to qualify for a credit, you have to have been issued the mortgage credit certificate (MCC) from the local government. Generally, the credit is issued only in connection with a new mortgage for the purchase of your principal residence.

Calculating Your Credit

The credit amount is based on the certificate issued by the local government agency. This can be determined using Form 8396.

1.) Mortgage not more than certified indebtedness. If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year.

2.) Mortgage more than certified indebtedness. If your mortgage loan amount is more than the certified indebtedness amount shown on your MCC, you can calculate the credit on only part of the interest you paid. To determine the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction.

Certified indebtedness amount on your MCC
Original amount of your mortgage

Example:

Edward bought a home this year. His mortgage loan is $200,000. The certified indebtedness amount on his MCC is $160,000. He paid $10,000 interest this year. Edward calculates the interest to enter on Form 8396, line 1, as follows

  • $160,000/$200,000 = 0.80 or 80%
  • $10,000 x 0.80 = $8,000

Edward enters $8,000 on Form 8396, line 1. In each later year, he will calculate his credit using only 80% of the interest he pays for that year.

Limits on the Mortgage Credit

1.) Based on credit rate. If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000.

2.) Based on tax. Your credit (after applying the limit based on the credit rate) generally cannot be more than the following.

  • Form 1040 filers: Your regular tax liability on Form 1040, line 44, plus any alternative minimum tax on Form 1040, line 45, minus certain other credits.
  • Form 1040NR filers: Your regular tax liability on Form 1040NR, line 42, plus any alternative minimum tax on Form 1040NR, line 43, minus certain other credits.

Carryforward

If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of your credit to the next 3 years or until used.

For Additional Information – Please see Publication 530