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Requirements to receive up to $2,000 for the Mortgage Interest Tax Credit (MCC)

First-time homebuyers may be eligible to get assistance with paying their mortgage through the Mortgage Interest Tax Credit. Here’s what you need to know…

How to claim up to $2,000 for the Mortgage Interest Tax Credit

Purchasing a home is one of Americans’ largest investments and a way to build wealth. First-time homebuyers may be eligible to receive financial assistance with their mortgage payments through the Mortgage Interest Tax Credit (MCC). The program is targeted at low- and moderate-income families to help them afford homeownership by offsetting a portion of the amount they owe in mortgage interest.

This is a dollar-for-dollar federal tax credit for a portion of mortgage interest paid each year which is administered by a state or local Housing Finance Agency (HFA). The credit could be worth up to $2,000, and the remainder of the interest may still be calculated as part of itemized deductions.

Requirements to receive up to $2,000 for the Mortgage Interest Tax Credit (MCC)

The MCC program was established by the Deficit Reduction Act of 1984 and modified by the Tax Reform Act of 1986. Only first-time homebuyers can qualify and the home must be the owners primary residence. You must go through an lender that is approved to offer mortgages with an MCC.

However, other eligibility requirements and the calculation for credit certificate vary depending on the rules in each state. There are a few states where the program is not available.

In order to qualify, each state imposes income limits which may range from $60,000 to $90,000. Likewise, the purchase price of the house must be less than the specified threshold in order to qualify for the MCC.

You can check with your state or local HFA to see if you qualify and what the other requirements are where you are home shopping before beginning.

How is the the Mortgage Interest Tax Credit (MCC) calculated?

The state or local HFA will calculate the amount of the MCC based on the multiplication of the mortgage amount by the mortgage interest rate and the MCC percentage set by the HFA, which can range from 10 to 50 percent.

Here’s an example calculation based on the National Association of Realtors prediction of 5.5 percent mortgage rate by mid-2023:

$150,000Mortgage amount
5.5%Mortgage interest rate
$8,250Annual Mortgage Interest
20%MCC percentage
$1,650Eligible credit amount

How to claim the Mortgage Interest Tax Credit (MCC)

The MCC must be claimed each year on your federal tax return using Form 8396. The credit is non-refundable which means that any portion of the credit in excess of what you owe in taxes will not be added to your refund, essentially you get less from the credit than you might otherwise qualify for.

For example you owe $1,500 in taxes and you are eligible for $1,625 from the MCC. The $125 in excess of what you owe cannot be added to your tax refund. But you may be able to claim other refundable credits which won’t be reduced because the MCC reduced your tax liability to zero in the case above. Always seek out professional tax advice so that you don’t leave on the table available tax credits that could get you a bigger refund.

Also those who claim the tax credit for the MCC should keep in mind the “recapture tax” by the IRS in limited circumstances. If you meet all three of the following criteria you may have to repay a portion of the tax benefit you gained from the MCC.

  • Sell your home before nine years have passed
  • Earn a capital gain from the sale of the home
  • Earn significantly more income at the time of sale than you did at the time you bought the home

However, because you must meet all three, this does not affect most beneficiaries of the MCC.