People have been asking about the first-time home buyer tax credit now available in New York State. This Mortgage Credit Certificate (MCC) program is MUCH more powerful than the federal first-time home buyer tax credit that helped support the real estate market for the past six months.
Here's the lowdown: if you are a first-time home buyer in New York State, and get a fixed rated loan, you can get a New York State income tax credit for 20% of your yearly mortgage interest through the life of the loan. For more specific details on the program, like income restrictions, go here. What does that mean? Well, let's say that you qualify for the program, and buy a home with a $200,000 30 year fixed rate mortgage at 5.5%. Each month, you'll have a payment of about $1,135, and in the first year you'll make mortgage interest payments of $10,932 (remember that part of your monthly payment goes to pay down the principal of the loan). So in your first year, you'll pay $10,392 in interest on your mortgage. Under the MCC program, you'll get a NYS income tax credit of 20% of that -- or $2,078. That money will go in your pocket so long as your state tax obligations are more than the amount of the credit; otherwise, if your state taxes are less, you can carry the tax credit over for up to three years.
And the rest of your mortgage interest is still deductible against both your state and federal income taxes -- i.e., your mortgage interest deduction will be for the remaining $8,313 (the total of $10,392 minus the credit of $2,078), which you will get to deduct against your taxes. Remember that a tax CREDIT is a lot better than a tax DEDUCTION. A credit is an actual dollar-for-dollar reduction in the TAXES OWED So long as you pay enough state taxes, you would actually get your state taxes reduced by $2,078. A deduction allows you to reduct your TAXABLE INCOME by the amount of the deduction, thereby reducing your tax liability. So in our example:
- you would pay $10,392 in interest on your mortgage
- you would reduce your TAXES OWED by $2,078.
- you would get a deduction for $8,313 off your taxes, saving you federal and state income taxes on that money.
Let's use an example. Bob Buyer purchases a home (not under the MCC Program) with that $200,000 30-year 5.5% fixed rate mortgage we described above. He and his wife Bonnie together make $100,000 in taxable income. Tax rates can be complicated because the rates go up as the income goes up, but let's just propose that on their last dollars of income Bob and Bonnie are going to be paying income taxes of 25% for their federal taxes and 6.85% for their New York State taxes. That's an effective tax rate on their last dollar of income of 31.85%. The mortgage interest they pay ($10,393) would come off their taxable income, so without the mortgage interest deduction, they would have had to pay taxes at that 31.85% rate. Thus, not having to pay taxes on the $10,393 would save them $3,310 of taxes (31.85% of $10,393). That's terrific, and shows the value of owning your own home. They paid $10,393 in mortgage interest, and got back $3,310 as a deduction in federal and state taxes. Now, it's even better. If Bob and Bonnie buy using the New York State MCC Credit, they get a New York State credit for 20% of their mortgage interest. That reduces their state tax obligation by $2,078. And on top of that they ALSO get to deduct the remaining $8,313 from their state and federal taxes, which at their tax rate now saves them $2,647. In other words, their tax deduction got a little smaller (reduced from $3,310 to $2,647, a difference of $662), but in exchange for that they got a direct credit of $2,078. All told, he and his wife now pay $10,393 in interest on their mortgage, and get back $4,726 (the $2,078 tax credit plus the $2,647 tax savings from the deduction). Essentially, the home they bought is only costing them $5,666 a year, or $572 a month in interest payments, once you add back their tax savings from owning their own home. Moreover, unlike the federal tax credit, the state tax credit is good for the life of the loan, for as long as you are in the property. That could be tens of thousands of dollars.
Written by Joseph Rand on Monday October 5, 2009 3:23 PM (re-publishsed with permission.)
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