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!