The MCC is a tax benefit based on the mortgage interest that you pay, and it does not suffer in any way from the new tax law, the Tax Cuts and Jobs Act of 2017. This law focused on the standard mortgage interest deduction and nearly doubled it. Now, couples that are married filing jointly, for instance, have a standard deduction of $24,800. This will, of course, lead to 93% of taxpayers taking the standard deduction as opposed to itemizing their deductions. But, if you’re not itemizing your deductions, then the standard mortgage interest deduction is actually of no benefit to you. This is why we encourage first-time homebuyers to also consider the MCC tax credit. Because of this new tax law, the MCC tax credit may be one of the only tax benefits that are still a viable option for a large majority of homebuyers. But to better understand why you need to recognize the difference between a tax credit and a tax deduction.
Q: What Are Tax Credits?
You see, tax credits are completely different from tax deductions because they actually subtract from the amount of tax that you owe. In essence, a tax credit increases your refund dollar for dollar. This is what makes the MCC tax credit such a fantastic deal!
Do you see the difference? Let us give you an example. A $2,000 deduction would only change your tax bill a few hundred dollars, at best. But a $2,000 credit is an actual $2,000, a true refund. Tax credits are dollar-for-dollar and help to increase home affordability every year — year after year.
But here’s the best part – you can claim both a deduction and a credit. If you do happen to be someone who itemizes your deductions — good for you! — and you receive a deduction for your mortgage interest, you can still claim the MCC tax credit!
Q: Who Is Eligible for the MCC Tax Credit?
Now that you’re excited about the MCC tax credit, let’s take a deeper look into who is actually eligible.
The MCC (Mortgage Credit Certificate program) was put in place by the federal government, but it’s administered by each state individually. Its purpose is to give assistance and relief to first-time homebuyers.
If you’re someone who has already bought your first home, unfortunately, you’re most likely out of luck. However, there are some exceptions:
States’ HFA (Housing Finance Agency) defines a “new” homebuyer as someone who has NOT had an ownership principal in a residence in 3 years. To put it more simply, if you bought a home in the past (so you’re not a first-time homebuyer), but have not owned a home in the past 3 years, you can still qualify for the MCC tax credit!
Homebuyers in Targeted Areas
The first-time homebuyer requirement is waived for borrowers purchasing a home in targeted areas as defined by the Department of Housing and Urban Development (HUD) by using the census tract level or designated by state governments.
Active Military and Veteran Homebuyers
The first-time homebuyer requirement is waived for active military and veterans.
Q: What are the Income Limits for the MCC Tax Credit?
Just like other tax credit incentives, the MCC program has a maximum income limit, which varies from state-to-state. Let’s use our location in Blair County — which is one of the poorer counties in Pennsylvania — as an example. 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+ household, your income must be no more than $107,600.
Q: Is there a Home Purchase Price Limit?
Yes, in addition to an income limit, to qualify for the MCC tax credit, there’s also a limit on the price of the house. To give you an idea, let’s use Blair County as an example again. To qualify for the MCC program, the home you wish to purchase cannot exceed $346,300. Honestly, 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. Another thing to keep in mind is that the mortgage tax credits (MCC) are funded by states using limited federal funds, so the benefit does “run out” during the budget year.
Q: How Do You Calculate How Much Credit You Can Claim?
The amount of credit you can claim is based on a percentage of the mortgage interest that 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 percentage is unique to you and your application.
Let’s say within 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 Year 1 – $2,876
50% of Mortgage Interest Paid– $1,438
Total Credit Earned – $1,438 (the maximum that can be applied to one year’s tax bill)
As you can see in the above scenario, the home buyers didn’t earn the full $2,000 max tax credit. Remember that the maximum benefit of the MCC tax credit is $2,000, which is partly why the rate will be lower as the principal balance of the loan increases.
Q: How Long Can the Credit Be Applied?
For the life of the loan! Yes, you read that right.
Now, as time moves forward, and as you continue to make mortgage payments, your payments will increasingly go towards the principal balance of your loan, and less towards interest. So, because the tax credit is based on the interest you pay, eventually, your annual mortgage interest paid for the year will dip and you will earn less. But until the home is sold or paid off in full, you can still claim the credit.
This means that homeowners could literally save tens of thousands of dollars by taking advantage of this program!
Q: How Do I Choose an MCC-Approved Lender?
Somewhat surprisingly, you do not have to buy your home via a Federal Housing Administration (FHA) loan in order to qualify for the MCC program. First-time homebuyers can use any and all types of mortgage loans.
Where things get a bit more difficult is when it comes to choosing your lender. You can only qualify for the MCC tax credit if you use an MCC-approved lender. You can find a list of your state’s approved lenders on your state’s MCC website. Unfortunately, if you live in a smaller town, there’s a good chance you may have no local lenders who are MCC-approved. However, hiring an out-of-town MCC-approved lender is okay — really, it is!
Your estate agent may not be too happy to find out that you’re planning to use an out-of-town lender for your home purchase, but this is only because real estate agents usually have two or three preferred local lenders. Out-of-town lenders can worry agents because they add an element of unknown to the process.
What goes through your real-estate agent’s head: What if the lender is hard to work with? What if there are unnecessary delays and the loan is not ready by the closing date? What if the lender decides to deny the loan even though they have said that it’s already been “pre-approved.”
Your agent’s concerns are understandable, but this is your loan and your tax credit, so remain firm that you had to use this MCC lender. There’s also a chance that your agent may have never even heard of the MCC tax credit, so it might take them a little time to understand why you need to use your lender.
Stick with my plan because it has literally saved you thousands of dollars!
Now, the big caveat. With many lenders, there’s an extra fee that they add to the loan for those who apply for the mortgage credit certificate program. You can anticipate that the fee will be around $600 and will most likely be added to your closing costs. This may seem like a lot of money at first, but remember that you’ll make up that cost (with an extra $1,400, hopefully) on our first tax return alone. And then, every following year, you’ll receive additional free money with your tax credit!
Q: I Already Bought My House, Can I Still Qualify for the MCC Tax Credit?
Some of you may be sitting on your couch right now and you’re thinking to yourself, “Hey, I’m still in my first home! I’m going to apply for this thing!” Sadly, once your home purchase is complete, you are no longer eligible for the MCC tax credit. You must apply for the program before you buy your home. This rule also applies to refinance loans. If the original loan did not include the MCC tax credit, you cannot add it during the refinance process. However, if you do have a mortgage credit certificate on your current loan and decide to refinance, you can apply to receive a new MCC tax credit issued against your refinanced mortgage.
Q: How do I Claim the MCC Tax Credit on My Tax Return?
You’ll use Form 8396 — Mortgage Interest Tax Credit — to claim your annual benefits, and the results of this form are either carried forward or used to increase your refund on your Form 1040. Don’t worry if this sounds confusing to you! Our CPA firm can prepare your personal taxes and properly report your MCC tax credit benefits on your annual Form 1040 when you’re personally filing IRS taxes.
A non-refundable tax credit is a complicated item to add to your personal tax return every year, especially when it involves available carryovers for unused credits. We know, that’s a lot of jargon! Our CPA firm is available year-round for assistance with any tax-related issues. We e-file in all 50 states and our fixed annual fee is just $175, with a typical preparation time of just seven days. We can help anyone in any state! A secure share-file upload is available and authorization signatures by text or email are accepted. Online services like TurboTax provide poor human customer service and prices very close to our fee once you add up all charges. Referrals are encouraged and welcomed by lenders and others!
Q: What is a “Non-Refundable” Tax Credit?
Remember that the MCC tax credit is a non-refundable tax credit. With refundable tax credits — even if your tax liability is $0 — you still receive the full amount of the tax credit in the form of a refund. With non-refundable tax credits, however, you can only use the credit to bring your tax liability down to $0. What this means is that if, after your deductions and credits, you owe little to no income tax, the mortgage credit certificate may not be very useful to you. In a low income year, the MCC tax credit will carry forward to next year.
Q: What If I Claim the Mortgage Interest Deduction?
Ah, yes, the mortgage interest deduction. Remember how we talked about that above? You can still benefit from the MCC tax credit even if you’re someone who does claim the mortgage interest deduction on your taxes. Yes, you can actually combine the two benefits together.
All you have to do is take however much of an MCC tax credit you received and subtract that amount from your mortgage interest deduction.
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 as opposed to $5,000.
In summary, you could:
Claim a $2,000 MCC tax credit, AND
Claim a $3,000 mortgage interest deduction
Pretty incredible, right? Again, I know the math may seem a little complicated, but if you use us as your CPA for your taxes, we will already have all these rules programmed in and will automatically combine the two benefits together for you!
Q: What is Recapture Tax?
Although recapture tax is unlikely to be a problem, it’s still something to be aware of and anticipate.
On the Federal Deposit Insurance Corporation’s (FDIC) MCC program guide, it’s explained that a borrower can owe a “recapture tax” on the resale of their home if they meet all three of the following criteria:
The borrower sells the home within nine years of purchase.
The borrower earns significantly more income than when they bought the home.
The borrower has a gain from the sale of the home.
If all three of these circumstances were to take place, your state could require that you pay up to 6.25% of the original principal balance of the loan or 50% of the gain on the sale of the home — whichever is less.
The FDIC guide is quick to note that most state’s housing agencies report that the majority of their program recipient’s have not been subject to recapture tax. However, if you have a feeling that there’s a good chance you may meet all three of the above criteria when you sell your home, don’t worry too much. Most likely, you’d still receive more overall benefits than you have to pay back.
Q: How Do I Refinance and Keep MCC Tax Credit Benefit?
If in the future you decide to refinance your original mortgage to get a lower interest rate or to obtain cash for an equity increase in the value of your home, you may be able to keep your MCC tax credit. By contacting your state agency that sponsored the MCC program, you should be able to merely transfer your MCC tax credit to the new mortgage. However, keep in mind that will only be able to use the original amortization amount for your tax credit benefits.
Q: Are There Any Other Eligible Homebuyers for the MCC Tax Credit?
We discussed this above, but it’s worth summarizing it again here. First-time homebuyers are eligible for the MCC credits, but so are those new home buyers without real estate ownership in the past three years. Housing in economically distressed housing tracts is eligible for tax credits on any limit eligible home purchaser. Veterans and active military are eligible for MCC tax credits on home purchases within limits. Each county has different limits on income and house price, so check with your state housing agency for your specific area.
Q: Can You Check my Prior-Year MCC Tax Credit Benefit Tax Filings?
Absolutely — remember, we’re here to help! There is no cost for a prior-year tax filing check (second look) of your MCC refund requests. Please contact us and we’ll obtain your information and give you a quick assurance that your tax filings are accurate, or offer amended tax filing costs and benefits if needed.
Q: Do You Have Any Examples on What The MCC Tax Credit Does?
We’d be more than happy to discuss examples of individuals and families benefiting from the MCC tax credit! In the meantime, here is an excellent case study on how the MCC Tax Credit can generate 20.83% lifetime savings on your housing cost!