The Difference Between Tax Credits and Tax Deductions

As an accounting firm, we get a lot of confused individuals who grapple with the difference between tax credits and tax deductions. Many of our clients don’t want to pursue the MCC Tax Credit because they want to focus on deductions. But for many homebuyers, you don’t have to choose; you can benefit from both credits and deductions. Even state-specific MCC programs, like the Texas Mortgage Credit Certificate Program (TDHCA MCC), for example, allow you to benefit from credits and deductions.

What are Tax Credits?

Let’s start with a basic understanding of tax credits. In simple terms, a tax credit is an incentive on your taxes. If you qualify, you can subtract the amount of the credit from what you owe the state at tax time. Tax credits can also work retrospectively regarding taxes already paid. 

Tax credits as incentives are popular tactics for homebuyers. The government wants you to buy a house because it’s good for the country and it’s a good investment! So to incentivize you, they give you a credit that reduces the amount of tax you owe. That’s how the MCC Tax Credit program works. ​

What are Tax Deductions?

Now let’s look at deductions. A tax deduction is different than credit because it doesn’t reduce the tax owed. Instead, it reduces the amount of income that the government taxes. You can use it to aid in accrued expenses, like when purchasing a home or starting a business.

The MCC Tax Credit — and its state-specific programs (each state has its own, like the TDHCA MCC (Texas), CFHA MCC (California), and IHDA MCC (Illinois), for example) — isn’t a deduction. It’s a credit, so it essentially refunds money spent rather than reduces one’s taxable income.

Which One: MCC Tax Credit or Mortgage Interest Deduction?

Again, there’s no reason to choose — you can benefit from both the MCC Tax Credit and the Mortgage Interest Deduction! Even if you already claim the mortgage interest deduction on your taxes, you can still combine the two benefits. All you have to do is take the amount of the MCC tax credit you received and subtract it from your mortgage interest deduction.

We’ll give you an example. Let’s say you paid $5,000 in mortgage interest during the previous year. If you lived in a state where you could claim 50% of your mortgage interest as a credit, you would receive the full $2,000 credit. Therefore, you would subtract $2,000 from your mortgage interest deduction total, claiming $3,000 instead of $5,000.

By combining the two benefits using this example, you can:

• Claim a $2,000 MCC tax credit, AND
• Claim a $3,000 mortgage interest deduction

When To Ask For Help

We understand that this process can be confusing for many people. That’s why our CPA firm is here to help! If you’re still puzzled by tax credits and tax deductions, or have questions about the MCC Tax Credit, including the state-specific programs like the TDHCA MCC or CFHA MCC — we know, it’s a lot! — then contact us. Our team can do this in our sleep, and we’re here to help you claim as many savings as possible when buying your first home. Let us make this process easy for you!