A Mortgage Credit Certificate (MCC) Program was authorized by Congress in the Tax Reform Act of 1986 and allows a homebuyer to claim a tax credit for a portion of the mortgage interest paid per year. It is not a tax deduction but a dollar for dollar reduction against their federal tax liability.
Depending on the amount of the mortgage, up to 50% of the interest paid per year can be applied as a tax credit. In addition, the remaining interest paid after the MCC tax credit can still be claimed as a deduction. Because the MCC can be calculated as a monthly savings, the buyer’s enrollment into the MCC Program is considered by loan underwriters in the buyer’s overall qualification for the purchase of a home (see savings in the chart below). This adjustment to the buyer’s federal income tax withholding will result in an effective reduction in their monthly housing costs and will lower the loan’s effective interest rate, thus increasing a buyer’s purchasing power!
HOW MUCH CAN YOU SAVE?
|
MCC Credit Rate |
20% |
30% |
50% |
|
Loan Amount |
$ 250,000.00 |
$ 150,000.00 |
$ 100,000.00 |
|
Interest Rate |
3.5% |
3.5% |
3.5% |
|
Annual Tax Credit** |
$1,750 |
$1,575 |
$1,750 |
|
Monthly Savings |
$145.83 |
$131.25 |
$ 145.83 |
|
Effective Interest Rate |
2.42% |
1.85% |
.60% |
|
Loans $150,001 or greater, no cap |
Loans of $100,001 to $150K, $2,000/year cap |
Loan of $100K or less, $2,000/year cap |
**The annual tax credit in this example represents an estimate of one full year on a 30 year mortgage. The annual tax credit will change each year as it is based on the interest paid on the remaining principal balance during the term of the loan.
In order to receive the MCC tax credit, a home purchaser must:
- meet income and home purchase requirements for the county the home is purchased in;
- have not owned a home as their primary residence in the past three (3) years;
- meet the qualifying requirements of the mortgage loan;
- use the home as their principal/primary residence.
It is important to note that the home purchaser must have a tax liability in order to take this credit. The size of the annual tax credit will be based upon the size of the loan and the maximum amount of the tax credit for loans up to $150,000 shall not exceed $2,000 per year. For example, on a $150,000 mortgage at 5% interest for 30 years, a total of $7,500 of interest is paid in the first year of which 30% is $2,250. The homeowner will receive a $2,000 tax credit for that year and the remaining $250 will roll into the next 3 years if and during which the max credit is not used (buyer must keep track of remaining credit). The credit cannot be larger than the annual federal income tax liability after all other credits and deductions have been taken into account.
Please consult a trustworthy mortgage lender for more information on this program and consult your CPA or tax account for more details about the potential tax benefits! (Information above provided courtesy of Colorado Housing & Finance Authority.)
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