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 certificate (MCC) 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 interest credit.

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 following fraction.

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.

Example. 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.

Limits

Two limits may apply to your credit:

1. A limit based on the credit rate, and
2. 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.

Example. 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

Carryforward

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.

Example. 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 3 years.

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 credit).

Example. 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.

Refinancing

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 MCC.

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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