How to Calculate Your MCC Tax Credit

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:

• Buying your first home
• Buying a home after not owning one for the past three or more years
• Buying a home in a targeted area designated by the Department of Housing and Urban Development (HUD)
• Buying a home as a veteran or active military

Income Limits

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:

• 1-2 person household – $92,200
• 3+ person household – $107,600

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. 
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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.

•         Loan Amount – $100,000
•         Interest Rate – 3.0%
•         Total Mortgage Interest Paid – $2,876
•         50% of Mortgage Interest Paid – $1,438
•         Total Credit Earned – $1,438 

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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!