2018 MCC – First Home Buyer Tax Credit
MCC mortgage credit certificates are a dollar for dollar Federal tax credit only available to eligible first time home buyers.
This tax credit almost didn’t survive the Tax Cuts and Jobs Act bill that was signed into law on December 22nd, 2017.
In November, Housing Finance Agencies (HFAs) across the Country sent out notices to approved lenders stating that the Mortgage Credit Certificate (MCC) program would be cut with the initial tax cut plans that were being proposed.
If you’re a first time home buyer (have not owned in the past 3 years), you should look up the income limit of your locally available MCC program.
After reading this article, you’ll understand how you can use a MCC to save thousands in future taxes, and why it’s the biggest secret in the world of home buyer assistance programs.
A mortgage credit certificate allows first time home buyers to exchange a portion of your mortgage interest deduction for a dollar for dollar tax credit.
The Tax Cuts and Jobs Act bill, now law, modified the limits for writing off mortgage interest down to a maximum loan amount of $750,000 on new homes purchased in 2018.
For the purposes of explaining how this program works, we will use a purchase price of $300,000, which is a little under the national average home price.
A mortgage credit certificate allows you to use a exchange a percentage of your mortgage interest into a tax credit. This percentage may vary from State to State, so be sure to check with your local MCC approved lender for your exact credit.
Calculating MCC Tax Credit
Ok, hopefully I didn’t lose you there. As all things related to the tax code, it’s a little complicated.
If you were following along, we are using a purchase price of $300,000, and for the mortgage credit certificate, a common credit percentage is 20%.
Here’s the formula for calculating your tax credit.
- Multiply your principle loan balance by your interest rate. This is amount of mortgage interest you will pay over 12 months. Example: $300,000 x 4% (interest rate) = $12,000
- Multiply the annual interest deduction by the MCC percentage. Example: $12,000 x 20% MCC credit = $2,400
- Your tax deductible mortgage insurance is reduced by the mortgage credit of $2,400
- You are now left with a mortgage interest deduction of $9,600 ($12,000 – $2,400 credit)
- You now have a credit of $2,400 to offset any taxes that you may owe.
NOTE: Tax credit may not exceed actual taxes owed, and can be carried into forward tax years for up to 3 years. Please consult your local MCC expert and tax specialist for actual numbers.
Tax Deduction vs Tax Credit
The mortgage interest you pay when you make your mortgage payment each month is a tax deduction. Most States will also allow your property taxes as a tax deduction.
A tax deduction reduces the amount of income used when calculating the amount of Federal income taxes owed. With enough tax deductions, you can change tax brackets to have all of your income taxes at a lower rate than if you would not have taken the deduction.
A tax credit is applied directly toward any outstanding tax liability you owe. In the above scenario, let’s say your total Federal taxes owed for the past year $7,500, and you normally would have received a couple of hundred dollars as a tax refund.
After using your tax credit, you will now get an additional $2,400 added to that!
NOTE: Consult your local MCC approved first home buying expert for details and guidelines specific to your local program. Consult a tax professional for how this tax credit will affect you specifically.
Why the Big Secret?
Unfortunately, if you are not researching and learning about this program yourself, chances are you will not hear about it.
The lender cannot make money off of a MCC, and it requires more paperwork. Inexperienced loan officers and call center lenders are not going to have the first clue about what a mortgage credit certificate is and how to get one.
In my experience, lenders and loan officers that do not know how these programs work will usually tell you that the program either does not exist, was discontinued, or that you do not qualify.
Work with an Expert
If you have to bring this program to the attention of your loan officer, you need another loan officer! There are plenty of loan officers that understand this program and can help.
Not working with a professional could cost you thousands of dollars in tax credits over the life of your loan!
Still have questions? You can either ask a question her, or leave a comment/question below and I will answer you right away.