Here at our CPA firm, we specialize in the MCC tax credit, a first-time homebuyer credit that reimburses a percentage of the interest you pay on your mortgage. It’s a great program, but many of our clients get confused when it comes time to file taxes. The MCC program offers a non-refundable tax credit, which makes it a bit more complicated. If you don’t know the difference between this type of credit and a refundable tax credit, then read on!
A Non-Refundable Tax Credit
Since we’re focused on the MCC tax credit for first-time homeowners, let’s start with this category. A non-refundable tax credit is one that can’t create a refund for your taxes. For example, let’s say you owe $1,000 on your taxes, but you received a non-refundable tax credit of $2,000. Just because you only use half of it to pay off your taxes doesn’t mean that you receive the remaining $1,000 as a refund. Why? Because that credit is non-refundable.
A Refundable Tax Credit
Now let’s look at the other side. If a tax credit is refundable, then the opposite is true. You would receive that remaining $1,000 as a tax refund, meaning that a refundable tax credit is beneficial even if you don’t owe any tax. Therefore, non-refundable tax credits are best when you owe taxes.
How to Make the Most of the MCC Tax Credit
So, what about the MCC tax credit? If it’s a non-refundable tax credit, and you’re a first-time homeowner who doesn’t owe a lot of tax, is it worth it?
MCC First-Time Homebuyer Credit
To answer that question, it’s best to understand how this first-time homebuyer credit works. To start, the MCC tax credit is a “reimbursement” of a percentage of the interest you pay on your mortgage. Although it’s a federal program, the rate that first-time homeowners receive back is determined by where one lives (each state is different). You’ll earn anywhere from 10% to 50% of that interest in the form of a non-refundable tax credit, but there is a maximum benefit. You can only receive up to $2,000 per year for the entirety of your loan. But on a 30-year loan, that’s a savings of up to $60,000.
How to Calculate Your Credit
On paper, that all seems worth it, doesn’t it? If you can genuinely take advantage of that credit, then saving any amount of money is excellent! You just have to take the initial steps to determine what percentage you’d receive, then calculate the rate based on your mortgage interest.
Let’s look at an example:
Loan Amount – $100,000
Interest Rate – 3.0%
Total Mortgage Interest Paid – $2,876
50% of Mortgage Interest Paid – $1,438
Full Credit Earned – $1,438
So, if you have a home loan of $100,000 with a 3% interest rate, then you’d pay $2,876 annually in interest on your mortgage. If you qualify for a 50% MCC tax credit rate, then you’d receive $1,438 as a non-refundable tax credit.
Now, just because a non-refundable tax credit can only bring your tax liability to $0 doesn’t mean that the remaining credit is wasted. You can “carry forward” your credit to the following year instead. This tactic is beneficial for those who anticipate a higher tax year in the future. If all of this refundable vs. non-refundable talk confuses you, know that you don’t have to navigate the process alone. Our CPA firm can help you!
As a first-time homeowner, you’re probably on the hunt for ways to save money. Lucky for you, purchasing a home is not only an excellent investment, it also stimulates the economy. As a result, the government offers numerous first-time homebuyer programs that incentivize the process. These programs keep money in your pocket! Although finding these incentives in each state takes a bit of time and research, we hope this article will get you on the right track.
MCC Tax Credit
At our online CPA firm, we specialize in the MCC tax credit program. Although this is a federal initiative, each state manages its own MCC tax credit, meaning that those who live in California may not receive the same benefit as those in New York or Montana. Each state program follows the same idea but uses different percentages to determine the overall credit.
A Percentage of Your Mortgage Interest
The MCC tax credit is one of the best first-time homebuyer programs because it reimburses a percentage of the interest you pay on your mortgage. What percentage? Well, that depends on where you live. Each state offers a different rate, somewhere between 10%-50%. However, there is a cap — the maximum tax credit you can receive each year is $2,000. But that annual perk is redeemable for the entirety of your loan. So on a 30-year loan, you can save up to $60,000. Not bad!
First-Time Homebuyer Programs in Each State
Now that you have a general idea of how the MCC tax credit works, it’s time to dive into your state. Remember, each state determines the percentage of your benefit differently, so you need to comply with the program where you live.
How do you find the MCC tax credit program in your state? Start with a simple Google search. Let’s say you’re a first-time homeowner in Texas. All you need to do is search something like “MCC program Texas.” Those buying homes in Texas will work with the TDHCA MCC, which stands for the Texas Department of Housing and Community Affairs. This organization manages the MCC program in Texas, so you’ll use the TDHCA MCC to determine your tax credit. (Other organizations also work with the MCC, such as the Texas State Affordable Housing Corporation (TSAHC).)
First-Time Homebuyer State Search
Another helpful search term is “[name of state] first-time homebuyer programs.” So, if you live in Texas, you can search “Texas first-time homebuyer programs” and find other options to save money as a first-time homeowner. You’ll probably find yourself looking at TSAHC again (keep in mind that TDHCA MCC is only for the MCC program).
In Texas, the TSAHC offers housing grants for first-time homeowners, plus other programs with a broader range of eligibility (teachers, social service providers, low-income buyers, etc.). You'll find these type of programs in any state, whether you live here in Pennsylvania, or in New York, Oregon, Louisiana... These programs have different benefits than the MCC tax credit and also differ from place to place.
Some examples of the benefits included in these types of state-run programs are:
Each state offers many different programs that supply these types of benefits to eligible homebuyers. You don’t necessarily need to be a first-time homeowner to participate, but some are strictly for those purchasing their first home. You just have to do a little research and sift through the internet to find which initiatives are offered in your part of the country!
If you don’t have time to research, Nerd Wallet offers a great resource that breaks down different first-time homebuyers programs in each state. If you have any questions about the MCC tax credit program or other helpful initiatives where you live, you can always contact our CPA firm. We’re always here to help!
Being a first-time homeowner is an exciting phase in life. Owning a home is not only an excellent investment for your future, but it’s a big step in laying roots in a community that might be yours for the long haul. Although it’s a process that may seem confusing or stressful, remember that it’s also a time to celebrate. And to lessen the stress, we’ll help you understand all the first-time homebuyer tax credits (such as the MCC Tax Credit) that can help you along the way.
Who is a First-Time Homeowner?
We address this topic a lot, but that’s because it’s an important distinction. Past blog posts have gone into more detail, but in essence, there’s a specific definition of a “first-time homebuyer.” Let’s look quickly at the different categories to determine if you’re eligible for first-time homebuyer credits:
Be On the Lookout for First-Time Homebuyer Tax Credits
The best thing you can do as a first-time homeowner is to start searching for programs that can help you afford your new house. There are a few obvious choices, while others require a little research. Keep in mind that many first-time homebuyer tax credits are unique to specific states, regions, or circumstances. You can always find a great local or online CPA firm to help you.
MCC Tax Credit
Let’s start with what we know best: the MCC Tax Credit. The MCC program is the first-time homebuyer credit that our CPA firm specializes in, and we help new homeowners file for this perk every year from all over the country. The MCC Tax Credit can feel a bit complicated because the benefits vary from state-to-state. To calculate how much money you can claim will depend on where you live, but the maximum benefit is $2,000 per year throughout your home loan. For a 30-year mortgage, that means you can save up to $60,000!
The MCC Tax Credit works with your state to determine what percentage of the interest you pay on your annual mortgage qualifies as a tax credit. This percentage can vary from 10% to 50%, depending on where you live. Aside from the official definition of who falls into the category of a “first-time homebuyer,” the MCC Tax Credit also places some restrictions on income and home prices. These limits depend on your state, but, in our opinion, they are relatively reasonable and allow a lot of lower-income and middle-class earners to qualify for this first-time homebuyer tax credit.
When the time comes, you’ll file Form 8396 with your annual taxes to receive your credit. If you need any help in understanding the MCC Tax Credit process, don’t hesitate to reach out to us!
Obama-Era First-Time Homebuyer Tax Credit
Maybe you’re looking for the official federally established first-time homebuyer tax credit enacted in 2008. That credit allowed first-time homeowners to receive up to $7,500 in credit, which Congress increased to $8,000 the year after. Unfortunately, this was a temporary tax credit initiated in response to the 2008 financial crisis by the Housing and Economic Recovery Act. In 2010, the government suspended the benefit, but those who purchased their first home during that time might still be able to claim this tax credit retroactively.
Although this credit doesn’t exist anymore, many government programs assist new homeowners with their mortgages. Many are still in the form of tax credits, but you must work with your specific state.
That brings us to the many, many programs offered by individual states! Remember when we said some of these programs require a bit of research? It may take a little digging on your part, but you’ll be pleased to find that every state offers some sort of assistance, whether in the form of tax credits, tax deductions, low-interest loans, grants, etc.
Let’s look at a few examples:
Mortgage Interest Deduction
Now, the mortgage interest deduction isn’t technically a first-time homebuyer tax credit because it’s a tax deduction, and other homeowners can apply as well. There’s a difference between credits and deductions, where the latter reduces the amount of income the government can tax. The Mortgage Interest Deduction subtracts the interest that homeowners pay on their loans from their taxable income.
That’s a huge incentive that benefits more than just purchasing — you can use it if you’re building or improving your residence, too. The best part? You can enjoy both the benefits of the MCC Tax Credit and the Mortgage Interest Deduction.
Find the Best Lenders, Realtors, and CPA Firms
As a first-time homeowner, you need to find people who will support you and help you save as much money as possible on your purchase. Not every lender, realtor, or CPA firm will have your best interests in mind. Many won’t want to work with you because they may find some of these tax credits to be complicated. Instead of being discouraged in the process, look on the bright side: by finding the right people, you’ll have the best experience possible!
If you want to apply for the MCC Tax Credit, you need a lender and a realtor who will support that process. That means securing an MCC lender. Many realtors prefer to work with local lenders that they know personally, so it may be off-putting to suggest someone different. Remember to advocate for yourself and insist on using lenders that support these tax credits.
And when you’re ready to apply for your tax credits and deductions, find a CPA firm that specializes in these processes. Our online CPA firm offers services beyond the MCC Tax Credit and can help anyone from across the country (and expats abroad) file their tax returns.
The MCC Tax Credit is an excellent financial incentive that can save first-time homebuyers up to $2,000 per year for the entirety of their home loan. The key to this phrase is “up to,” meaning that some eligible first-time homeowners will earn less than $2,000. This particularity leaves many buyers wondering how to calculate their tax credit. Don’t worry — we’re here to help you understand the process!
MCC Tax Credit Restrictions
Before you start calculating your benefit, it’s essential to understand the restrictions of the program. Although the MCC Tax Credit is a federal program, each state manages the benefits individually, meaning that first-time homeowners will adhere to different constraints and earn different credit amounts depending on where they live. For example, Texas has the TDHCA MCC, California, the CHFA MCC, and so forth.
“First-Time Homebuyer” Definition
To start, you must be a “first-time homebuyer” that fits into the official definition by the HFA (Housing Finance Agency). We explained how to determine if you qualify for the tax credit in a previous blog post, but to sum it up, you must fall into one of the following categories:
Another restriction is your income. Because the MCC Tax Credit strives to help lower-income earners purchase a home, there are limits on how much income you can make. This is a standard rule with many tax credits and will differ from state to state. For example, if you live in Texas, you must follow the limits according to the TDHCA MCC.
To help you understand, let’s use our office's location in Blair County as an example. Keep in mind, Blair County is one of the more impoverished areas in Pennsylvania, so the limits are lower than in other regions.
Here are the income limits:
So, if you want to purchase a 1-2 person household and want to qualify for the MCC Tax Credit, your annual income must be no more than $92,200. For a 3+ person home, your earnings must be no more than $107,600.
House Price Limits
Lastly, the MCC Tax Credit also has limits on how much your new home can cost. To give you an idea, let’s use price limits in Blair County again, but remember that your state will have different guidelines. To qualify for the MCC program in Blair County, the home you wish to purchase cannot exceed $346,300.
At our CPA firm, we find both the income and price limits to be quite reasonable, especially when compared to many other government-sponsored programs that result in very few middle-class families qualifying. Check with your local limits (again, the TDHCA MCC in Texas, the CHFA MCC in California, etc.).
How to Calculate Your Tax Credit
Now that you understand the restrictions on first-time homebuyers applying for the MCC Tax Credit, it’s time to look at how to calculate your benefits. The amount of credit you can claim is based on a percentage of the mortgage interest you paid during the previous year and can fall anywhere between 10-50%.
The more expensive the home purchase, the lower the percentage will be, and the rate is unique to you and your application. Those who file in Pennsylvania will use the PHFA 1098 to understand how much interest they paid. Other states have individual forms, but for locals, the PHFA 1098 shows you the figure to calculate your benefit.
Let’s say, as a first-time homeowner in your state, you qualified for a 50% credit on the mortgage interest that you pay. Here’s an example of what that could look like if your home loan was $100,000.
As you can see in the above scenario, the homebuyers didn’t earn the full $2,000 maximum tax credit.
Using a CPA Firm For Help
We hope that our website and this blog post are excellent resources for you, but don’t think that you have to navigate this complicated process independently. You can find online CPA firms like ours that can help walk you through the process and ensure that you’re getting the most benefit from the MCC Tax Credit. We can help you obtain all your paperwork and adequately calculate your perk using the PHFA 1098 (or the form in your home state) and file Form 8396 when tax season comes along. Feel free to contact us if you have any questions!