Why You Should Use the MCC Tax Credit in 2021

If you’re hoping to buy a house this year, utilizing the MCC tax credit program is an excellent idea. As accountants, our CPA firm serves clients across the nation, many of whom are first-time homebuyers looking to save money on such a purchase. We always steer them in the direction of the MCC tax credit because it works so well. And after brushing up on some 2021 housing market predictions, many new homeowners will rely on these types of programs.

The 2020 Housing Market and 2021 Predictions

Last week, we published an article answering the question we always get: Should I buy a house this year? It seems that once the clock strikes midnight on New Year's Eve, people are thinking about homeownership and wondering if this is the year to take the plunge. As we always tell them, what matters most is your personal finances. Unless you’re financially ready to buy a house, it’s best to wait. The MCC tax credit program can help make a home more affordable; however, sometimes housing market trends can get in the way.

2020 Housing Market Trends

To say the least, 2020 was an odd year. At the start, the housing market was running its typical course. But once the pandemic hit, many people transitioned to remote work and wanted to relocate out of big cities. Supply was high, but demand snowballed. As a result, housing prices increased, but we also saw record-low mortgage rates. Relocating to smaller, more affordable cities was already a trend at the beginning of 2020, but the pandemic influenced it even more.

2021 Housing Market Predictions

Now, what about 2021? Experts predict that the surge in demand in 2020 will lower supply and increase housing prices earlier than in a typical year. Some say that the average cost of buying a house will increase by up to 9%. Unfortunately, this prediction means that those who are buying their first home, or those from lower-income households, will have more of a challenge entering the housing market. This impact makes it even more critical for first-time homeowners to use money-saving programs like the MCC tax credit. ​

What is the MCC Tax Credit?

We explore this topic in-depth throughout our website, but it’s worth giving a little summary here, as well. The MCC tax credit is a credit that first-time homeowners can receive annually throughout their home loan. The amount you can make is a percentage of the interest you pay on your mortgage, with a yearly cap of $2,000. So, if you have a 30-year loan, that means you can save up to $60,000 on your home. ​

How to Qualify for the MCC Tax Credit

To qualify for this tax credit, you must be a “first-time homeowner” as defined by the Finance Housing Agency. They use four categories:

1. First-time Homebuyer: You’re buying your very first home, and you haven’t owned a house in the past.
   
   
2. Newer Homebuyer: You’ve owned a house before, but it’s been three or more years since the most previous ownership.
   
   
3. Homebuyer in a Targeted Area: Each state predetermines these targeted areas. If you're buying a home there, you don’t have to be a “first-time” or “newer” buyer.
   
   
4. Active Military or Veteran: The “first-time” and “newer” definitions don’t apply if you’re involved in the military or a veteran.

If you fall into any of these categories, then you can qualify for the MCC tax credit. Every state has a different approach, so those in New York might receive more credit than their best friend in a different state, or vice versa. A previous blog post of ours dives into what states offer the MCC tax credit and other helpful homebuyer programs.

How to Calculate Your Tax Credit

Once you know that you qualify for the MCC tax credit, it’s time to organize your paperwork. Before you buy your house, you must work with your lender and real estate agent to complete all the necessary paperwork to obtain the MCC mortgage credit certificate. Without this certificate, you cannot receive the tax credit! Ensure that your lender and agent are MCC-friendly — it will save you a big headache later on.

To calculate your credit, you’ll need to determine what percentage to use. You’ll work with your state’s MCC tax credit program provider. For example, in Texas, residents obtain their rate from the Texas Department of Housing and Community Affairs (TDHCA MCC). Then, when it comes time to file your taxes, you’ll use a tax form to determine how much interest you paid on your mortgage. Here in Pennsylvania, we use the PHFA 1098, but you’ll need to use the one from your state. 

For your taxes and to calculate your credit, you’ll need to gather:

• MCC mortgage credit certificate;
• your MCC-approved home loan;
• the percentage you’ll use to calculate your credit; and
• the tax form to show the mortgage interest paid.

Then you can start your calculation. Here’s an example:

Loan Amount – $100,000
        Interest Rate – 3.0%
        Total Mortgage Interest Paid – $2,876
        50% Rate 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.

MCC Tax Credit in 2021

The MCC tax credit is an excellent tool in any year. As long as you’re a homebuyer who falls into one of the “first-time homeowner” categories, you save money on your home purchase. But with high-price home predictions on the horizon for 2021, the MCC tax credit program is even more desirable. For many, it could be the trick that allow you to buy your home. If you ever have any questions about the MCC tax credit or any tax inquiries, please reach out to us! We love helping people save money on their dream homes.