Mortgage credit certificates: a yearly tax credit for some buyers

What an MCC is

An MCC is issued by a state or local governmental unit or agency under a qualified program. Publication 530 says it is generally issued only with a new mortgage to buy your main home, and that you must contact the agency before you get the mortgage and buy the home. Your state or local housing finance agency is the place to ask. Programs usually have income and purchase price limits, and many are aimed at first-time buyers.

The certificate shows two numbers that matter: the certificate credit rate and the certified indebtedness amount. Only interest on the certified amount counts toward the credit.

How the credit is figured

On Form 8396 you multiply the mortgage interest you paid on the certified amount by the certificate credit rate. Two limits then apply:

• Rate limit. If the certificate credit rate is above 20 percent, the credit cannot be more than $2,000 for the year. If it is 20 percent or less, this cap does not apply.
• Tax limit. After the rate limit, the credit generally cannot exceed your tax liability. The Form 8396 instructions include a worksheet for this.

If the tax limit cuts the credit, Publication 530 lets you carry the unused part forward to the next three years or until it is used up, whichever comes first.

The interest deduction still works, reduced

An MCC does not stop you from itemizing. Publication 530 says that if you itemize, you must reduce your mortgage interest deduction by the amount of the credit shown on line 3 of Form 8396, even if part of it is carried forward. In Maya's 20 percent case, she could deduct $12,000 of interest instead of $15,000.

Many first-time buyers take the standard deduction anyway. For them, the credit is the only federal tax benefit tied to their mortgage interest.

When the lender counts it

A yearly credit is effectively more money in your budget, and some loan programs let lenders count it when qualifying you. Fannie Mae's Selling Guide has a section on mortgage credit certificates as a source of qualifying income. Ask your lender whether it uses the credit and how.

Selling within nine years

Publication 530 warns that if you bought a home after 1990 using an MCC and sell it within nine years, you may have to recapture, or pay back, all or part of the benefit. Publication 523 explains how the recapture is figured, so read it before you count on selling early.

Questions to ask the agency

• Is the MCC program open now, and what does it cost to apply?
• What is the certificate credit rate?
• What are the income and purchase price limits?
• Which lenders participate?
• Can the MCC be combined with the agency's down payment help?

The bottom line

An MCC can be worth a steady credit each year, but its value depends on the rate, the $2,000 cap above 20 percent and your own tax bill. Apply through the agency before you close. Then check each year's Form 8396 instructions, because tax figures are tied to the year you file.