How Do I Claim the MCC Mortgage Credit on My Tax Return?

The Mortgage Credit Certificate (MCC) program helps homebuyers reduce their federal tax liability, making homeownership more affordable. Unlike a deduction, this credit directly lowers the taxes owed, potentially saving homeowners thousands over the life of their loan.

Eligibility Criteria

Qualifying for the MCC program depends on income limits, home price, and first-time homebuyer status. Each state or local housing agency sets guidelines within federal requirements under Section 25 of the Internal Revenue Code.

Income limits vary by location and household size. Higher-cost areas have higher thresholds, while lower-cost regions impose stricter caps. For example, in 2024, a household of three in a high-cost metropolitan area may qualify with an income up to $120,000, while the same household in a rural county might face a cap of $90,000.

The home’s purchase price must also fall within program limits, which differ by region. The IRS sets a baseline, but state agencies adjust figures based on local housing markets. In competitive real estate markets, the maximum allowable price may exceed $500,000, while in less expensive areas, it could be closer to $300,000. Buyers should check with their state’s housing finance agency for the latest figures.

First-time homebuyers generally receive priority, defined as individuals who have not owned a primary residence in the past three years. Exceptions exist for veterans using VA benefits and those purchasing in designated target areas, where homeownership rates are low. These areas often have more lenient income and purchase price limits to encourage investment in underserved communities.

Credit Calculation

The MCC credit is based on the mortgage interest paid each year and the credit percentage assigned by the issuing agency, typically ranging from 10% to 50%. If the percentage exceeds 20%, the maximum annual credit is capped at $2,000.

For example, if a homeowner pays $8,000 in mortgage interest and their MCC rate is 25%, the credit would be $2,000, as the calculated amount reaches the cap. If the MCC rate were 15%, the credit would be $1,200 ($8,000 × 15%), allowing the homeowner to claim the full amount. Any remaining mortgage interest not covered by the credit can still be deducted on Schedule A if itemizing deductions.

The credit is non-refundable, meaning it can only reduce tax liability to zero but does not generate a refund. If the credit exceeds taxes owed in a given year, unused amounts may be carried forward for up to three years. This carryforward provision benefits homeowners whose income fluctuates or who anticipate higher tax liability in later years.

Claiming the Credit on Tax Returns

To claim the MCC mortgage credit, homeowners must complete IRS Form 8396, Mortgage Interest Credit, and attach it to their tax return. This form requires the certificate number, issuing agency’s name, and credit percentage. The credit amount is then reported on Schedule 3 of Form 1040, which consolidates nonrefundable credits.

Accurate record-keeping is essential. Homeowners should retain their Mortgage Credit Certificate, annual mortgage interest statements (Form 1098 from their lender), and any previous years’ carryforward amounts if applicable. Discrepancies between reported interest and lender-provided documents could trigger an IRS review, delaying processing or requiring additional documentation.

If a homeowner refinances, they must contact the issuing agency to determine whether they can retain MCC benefits or if a reissuance is required. Refinancing without proper reissuance could invalidate future credits.