Mortgage credit certificates (MCCs) can help with your tax bill in relation to your mortgage payments. MCCs come from originating mortgage lenders, and they turn the mortgage interest you pay directly into a tax credit, which is non-refundable. They are most often used by those with lower incomes to aid them in buying a home. If you have questions about how the purchase of a home can affect your long-term finances, consider speaking with a financial advisor.
A mortgage credit certificate, or MCC, is a tax credit the IRS gives to low and moderate income homebuyers. Generally the program is only available to first time homebuyers. Terms differ by state. An MCC can be a great way to use your home to save money on your taxes, but there are some drawbacks as well as hidden costs, so use caution in deciding whether to use the program.
An MCC is not credited at the closing of the loan, but on the homeowner’s federal taxes in the future. The credit can be used for each future tax year in which the mortgage is held that the homeowner has a tax liability. The amount of the tax credit is equal to 20% of the mortgage interest paid for the tax year. The remaining 80% interest is still eligible as a tax deduction. If the mortgage is ever refinanced, the MCC will be voided, even if the recipient still owns the home.
An MCC usually costs around $650 up front, and mortgage lenders may charge an additional $100 processing fee at their discretion.
While an MCC sounds like a great way to save money over the long term, many people who apply for an MCC end up disappointed. The difficulty stems from the fact that the IRS imposes a strict income limit on qualification.
The IRS determines the maximum annual income for each county in the nation. These limits are close to, but not necessarily tied to, median income figures. Since the maximum income is the same for single or dual occupancy households, it is much easier for a single person to qualify for an MCC than for married couples or families. As part of the approval process, the IRS will review an applicant’s tax returns and count any income shown toward the maximum income for the program, even if the homebuyer is not using an income source for mortgage loan qualifying.
Even if approved for an MCC, many people who fall into the income requirements find that they do not have enough of a tax liability to get their money’s worth out of the program. This is especially true for families who receive a child tax credit.
A further drawback to the MCC looms if the certificate holder sells their home within the first nine years of ownership. A recapture tax may be due for some of the savings of the MCC. Thus, even if you’re able to maximize tax savings from an MCC, its benefits may disappear down the road through the recapture tax.
Despite the drawbacks, an MCC can be a good way for many people to reap tax savings through their mortgage, especially if you plan to own the home for longer than nine years. If you are a first time homebuyer, talk to both your mortgage lender and your tax preparer about the program. If your income falls within your county’s limit, your lender and CPA can help you determine if there are any long-term savings the program can offer you.
Should you decide to apply for an MCC, you must do it prior to closing on your new home. The lender needs to apply for the program through the IRS, then the IRS needs to approve it, which may take one to two weeks. Once approved, you have 90 days to close on your home purchase.
Buying a home is one of the most exciting times of your life. And the bottom line is that MCCs can help you get into your new home for cheaper. This is especially true for those that are a little strapped for cash, as MCCs provide strong tax benefits for families in situations like this.
However, despite the potential perks of MCCs, they have some characteristics that may not make it worthwhile for your specific situation. Therefore it’s incredibly important to speak things over with a professional before finalizing any moves.
Photo Credit: © iStock.com/Tinnakorn Jorruang, © iStock.com/Ridofranz, © iStock.com/Paperkites
Gregory Erich PhillipsGregory Erich Phillips has more than a dozen years of experience in the mortgage industry. He is an active mortgage loan officer and an expert resource on topics including economics, home financing and real estate trends.
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