How Mortgage Credit Certificates Work – Introduction
A Mortgage Credit Certificate, commonly known as MCC, is a dollar for dollar tax credit similar to the first time homebuyer tax credits we saw in 2008 and 2009, that will directly reduce the amount of taxes you will have to pay, or get refunded at the end of the year.
The math for MCC programs is the same all over, but I’m going to specifically focus on the The State of California MCC offered through the California Housing Finance Agency (CalHFA).
The CalHFA Mortgage Credit Certificate is a tax credit program that offers a federal income tax credit, which can reduce your federal income tax liability. This credit creates additional net spendable income which you may use toward your monthly mortgage payment.
Dollar for Dollar Tax Savings
Most homebuyers know that one of the greatest benefits of homeownership is the tax deduction you receive from paying interest on a mortgage loan.
If you have never owned a home, you may be currently filing a 1040 EZ tax form and only taking standardized tax deductions. Once you own a home, you will most likely start itemizing your deductions to realize even greater tax savings at the end of each year.
Mortgage interest is one of the most powerful tax deductions that qualified tax payers can deduct from your net taxable income at the end of the year.
You will always want to consult a tax professional to fully understand tax deductions and itemization opportunities. I am neither a tax consultant, nor tax professional. I am only sharing publicly available information that can be found with little effort online.
Ok, with the disclaimers out of the way, let’s get down to the business of keeping more of your hard earned dollars in your pocket!
How to Calculate Your Tax Savings
First, let’s calculate what your tax deduction would be by simply buying your home.
Loan Amount: $300,000
Interest Rate: 4.5%
Yearly Interest: $13,500
Now, we are going to take advantage of a 20% Mortgage Credit Certificate so that we can realize this tax savings today.
Here’s what that looks like:
Yearly Interest: $13,500 x 20%
= *20% MCC: $2,700
*Maximum MCC tax credit that can be used in any given tax year is limited to $2,000 if the MCC credit is greater than 20%. Consult your CPA or accountant for details. Also see: IRS Tax Form 8396
After subtracting the MCC tax credit of $2,700, you now have $10,800 that you can deduct from your net taxable income on your yearly federal tax return.
Mortgage interest is used to reduce your taxable income, and in some cases can keep you from pushing up into the next higher tax bracket. This is just one of the incredible benefits of homeownership.
Now it’s time to put our MCC tax credit of $2,700 back on the table. As you’ve noticed, by deducting the MCC credit amount from your total mortgage interest deduction, you have a lower mortgage interest deduction, right?
So you’ve increased your net taxable income by $2,700. If you’re in a 15% tax bracket, that just cost you $405 that you will either have to pay, you will not get back when you file your federal tax return.
Bummer, right? Not at all.
This $2,700 is a dollar for dollar tax deduction that you get to use when your taxes every year that you own this home. For instance, if owe $3,000 in federal taxes at the end of the year, you apply the Mortgage Credit and you now only owe $1,000.
If you have overpaid your taxes, and are expecting a refund at the end of the year, you just increased your refund by $2,000!
Not such a bummer after all, right? A $400 investment that gives you a return of $2,700 is not bad at all! In addition to putting more money in your pocket, you are earning equity on your home every day that you drive up that driveway, and that puts money into your retirement plan!
Again, I would like to stress, you should always consult a tax professional to fully understand tax deductions and itemization opportunities. I am neither a tax consultant, nor tax professional. I am only sharing publicly available information that can be found with little effort online.