The mortgage interest credit is intended to help lower-income
individuals afford home ownership. If you qualify, you can claim the
credit each year for part of the home mortgage interest you pay.
To be eligible for the credit, you must get a mortgage credit
from your state
or local government. Generally, an MCC is issued only in connection
with a new mortgage for the purchase of your main home.
The MCC will show the certificate credit rate you will use to
figure your credit. It will also show the certified indebtedness
amount on which the interest is eligible for the credit.
You must contact the appropriate government agency about getting an
MCC before you get a mortgage and buy your home. Contact your state or
local housing finance agency for information about the availability of
MCCs in your area.
Claiming the credit.
To claim the credit, complete Form 8396 and attach it to
your Form 1040. Include the credit in your total for line 49 of Form
1040, and check box b.
Reducing your home mortgage interest deduction.
If you itemize your deductions on Schedule A (Form 1040), reduce
your home mortgage interest deduction by the amount of the mortgage
Selling your home.
If you purchase a home after 1990 using an MCC, and you sell that
home within 9 years, you will have to recapture (repay) a portion of
the credit. For additional information, see Publication 523.
Figuring the Credit
Figure your credit on Form 8396.
Mortgage not more than certified indebtedness.
If your mortgage is equal to (or smaller than) the certified
indebtedness amount shown on your MCC, enter on line 1 of Form 8396
all the interest you paid on your mortgage during the year.
Mortgage more than certified indebtedness.
If your mortgage is larger than the certified indebtedness amount
shown on your MCC, you can figure the credit on only part of the
interest you paid. To find the amount to enter on line 1, multiply the
total interest you paid during the year on your mortgage by the
formula: mortgage greater than MCC amount
This fraction, which you may change
to a percentage, will not change as long as you can take the credit.
Emily bought a home this year. Her mortgage loan is $50,000. The
certified indebtedness amount on her MCC is $40,000. She paid $4,000
interest this year. Emily figures the interest to enter on line 1 of
Form 8396 as follows:
Formula: Emily example
Emily enters $3,200 on line 1 of Form 8396. In each
later year, she will figure her credit using only 80% of the interest
she pays for that year.
Two limits may apply to your credit:
- A limit based on the credit rate, and
- A limit based on your tax.
Limit based on credit rate.
If the certificate credit rate is higher than 20%, the credit
cannot be more than $2,000.
Limit based on tax.
Your credit (after applying the limit based on the credit rate)
cannot be more than your regular tax liability on line 40 of Form
1040, plus any alternative minimum tax on line 41 of Form 1040, minus
certain other credits. Use Form 8396 to figure this limit.
Dividing the Credit
If two or more persons (other than a married couple filing a joint
return) hold an interest in the home to which the MCC relates, the
credit must be divided based on the interest held by each person.
John and his brother, George, were issued an MCC. They used it to
get a mortgage on their main home. John has a 60% ownership interest
in the home, and George has a 40% ownership interest in the home. John
paid $5,400 mortgage interest this year and George paid $3,600.
The MCC shows a credit rate of 25% and a certified indebtedness
amount of $65,000. The loan amount (mortgage) on their home is
$60,000. Because the credit rate is more than 20%, the credit is
limited to $2,000.
John figures the credit by multiplying the mortgage interest he
paid this year ($5,400) by the certificate credit rate (25%) for a
total of $1,350. His credit is limited to $1,200 ($2,000 x 60%).
George figures the credit by multiplying the mortgage interest he
paid in this year ($3,600) by the certificate credit rate (25%) for a
total of $900. His credit is limited to $800 ($2,000 x 40%).
Table 2. Effect of Refinancing on MCC Credit
If your allowable credit is reduced because of the limit based on
your tax, you can carry forward the unused portion of the credit to
the next 3 years or until used, whichever comes first.
You receive a mortgage credit certificate from State X. This year,
your regular tax liability is $1,100, you owe no alternative minimum
tax, and your mortgage interest credit is $1,700. You claim no other
credits. Your unused mortgage interest credit for this year is $600
($1,700 - $1,100). You can carry forward this amount to the next
Credit rate more than 20%.
If you are subject to the $2,000 limit because your certificate
credit rate is more than 20%, you cannot carry forward any amount more
than $2,000 (or your share of the $2,000 if you must divide the
In the earlier example under Dividing the Credit, John
and George used the entire $2,000 credit. The excess $150 for John
($1,350 - $1,200) and $100 for George ($900 - $800) cannot
be carried forward to future years, despite the tax liabilities for
John and George.
If you refinance your original mortgage loan on which you had been
given an MCC, you must get a new MCC to be able to claim the credit on
the new loan. And the amount of credit you can claim on the new loan
may change. Table 2 summarizes how to figure your credit if
you refinance your original mortgage loan.
An issuer may reissue an MCC after you refinance your mortgage, but
only up to one year after the date of the refinancing. If you did not
get a new MCC, you may want to contact the state or local housing
finance agency that issued your original MCC for information about
whether you can get a reissued MCC.
Year of refinancing.
In the year of refinancing, add the applicable amount of interest
paid on the old mortgage and the applicable amount of interest paid on
the new mortgage, and enter the total on line 1 of Form 8396.
If your new MCC has a credit rate different from the rate on the
old MCC, you must attach a statement to Form 8396. The statement must
show the calculation for lines 1, 2, and 3 for the part of the year
when the old MCC was in effect. It must show a separate calculation
for the part of the year when the new MCC was in effect. Combine the
amounts of each line 3, enter the total on line 3 of the form, and
write "See attached" on the dotted line.
New MCC cannot increase your credit.
The credit that you claim with your new MCC cannot be more than the
credit that you could have claimed with your old MCC.
In most cases, the agency that issues your new MCC will make sure
that it does not increase your credit. However, if either your old
loan or your new loan has a variable (adjustable) interest rate, you
will need to check this yourself. In that case, you will need to know
the amount of the credit you could have claimed using the old MCC.
There are two methods for figuring the credit you could have
claimed. Under one method, you figure the actual credit that would
have been allowed. This means you use the credit rate on the old MCC
and the interest you would have paid on the old loan.
If your old loan was a variable rate mortgage, you can use another
method to determine the credit that you could have claimed. Under this
method, you figure the credit using a payment schedule of a
hypothetical self-amortizing mortgage with level payments projected to
the final maturity date of the old mortgage. The interest rate of the
hypothetical mortgage is the annual percentage rate (APR) of the new
mortgage for purposes of the Federal Truth in Lending Act. The
principal of the hypothetical mortgage is the remaining outstanding
balance of the certified mortgage indebtedness shown on the old MCC.
You must choose one method and use it consistently beginning with
the first tax year for which you claim the credit based on the new
As part of your tax records, you should keep your old MCC and the
schedule of payments for your old mortgage.
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