Once approved for MCC, you can receive a dollar for dollar tax credit of 20% of the annual mortgage interest you pay AND deduct the other 80% of mortgage interest paid as an itemized deduction from your taxable income.
The mortgage credit each year depends on the amount of interest paid on your mortgage but cannot exceed your annual Federal tax liability. Any unused credit can be carried forward for a maximum of 3 years to reduce future tax liability.
How does the MCC program work?
For example, if you purchased your home with a $500,000 30 year fixed loan at 6% interest rate, here is what the tax benefit would look like with a Mortgage Credit Certificate:
- The principal and interest (P&I) payment is $2,997 per month and in the first full year of home ownership, you will have paid a total of $29,832 in mortgage interest.
- With MCC, you could receive the maximum dollar for dollar tax credit of $5,966 (20% X $29,832) assuming your Federal tax liability is at least $5,966.
- This $5,966 in MCC tax credit results in a monthly savings $497 in Federal Income Tax. You can adjust the withholding on your employer’s W4 form to reduce the taxes withheld from your paycheck by $497 per month. This method allows you take advantage of the benefits monthly instead of waiting for a tax refund from the IRS the next year you file your tax return.
- The monthly Federal tax savings of $497 effectively reduces the financial impact of your $2,997 monthly P&I payment to $2,500 per month, helping make your home more affordable. Lenders can use this monthly tax benefit to help you qualify for your home loan.
- Additionally, you can still deduct the remaining 80% ($23,865) of the mortgage interest paid as an itemized deduction on Schedule A of your 1040 Tax Return.
How do you qualify for an MCC? Here are the basics:
- You must be a first time homebuyer defined as a homebuyer who has not held ownership interest in their primary residence in the last 3 years. If you owned and sold a primary residence more than 3 year ago, you could qualify. If you currently own real estate held as an investment property, you could qualify as long as you did not reside in that home as your primary residence in the last 3 years.
- You must purchase the home as your primary residence and claim the benefit of MCC as long as you continue to reside in the home as you primary residence. If you relocate to another primary residence, the MCC is no longer valid and the credit can no longer be claimed, even if you move back into the home at a later date.
- The mortgage used to purchase your home with MCC must be a brand new loan. You cannot use MCC to assume an existing loan.
- You must apply for an MCC through approved lenders who participate in the MCC Program. In Hawaii, you can find the list of approved lenders here: http://dbedt.hawaii.gov/hhfdc/participating-mcc-lenders/
- The Hawaii Housing Finance Development Corporation (HHFDC) is the issuer of Mortgage Credit Certificates (MCC) in Hawaii and they require a $25 application fee along with a $400 processing fee. The $25 fee is paid via cashier’s check or money order at the time of application and the $400 is typically collected at closing in conjunction with your approval issuance of the MCC.
Every State that offers the MCC Program will have different household income and purchase price limits for you to meet to qualify for MCC. Once you qualify for the MCC Program at the time of purchase, you do not have to re-qualify to take advantage of the tax credit as long as you reside in the home as your primary residence. In Hawaii, Honolulu County specifically, these are the income and purchase price limits for 2023:
- Families or 2 or less: $142,419
- Families of 3 or more: $163,782
- Newly constructed or existing fee simple residences: Max purchase price $621,067
The MCC tax credit is considered to be a subsidy by the Federal government and as such, you may be subject to a recapture tax of some of the benefit you received during the period you claimed the MCC tax credit. In order to be subject to any recapture tax, ALL three of the following conditions must apply:
- You sell your home within 9 years of purchase, and
- You make a profit on the sale, and
- Your income increases above a specific level on a “recapture tax income table.” This table displays the max income limit for each County and Household Size depending on how many years you own the property prior to selling and is provided to you at the time of application. As long as your income does not exceed this level, then you would not be subject to the recapture tax.
The MCC program can be approved for your home purchase in combination with Conventional, VA, FHA, and USDA lending. Your selected lender will establish their requirements to qualify for the mortgage loan, such as loan type, loan term, down payment, credit, income, assets and mortgage insurance (PMI) and closing costs such as points, fees, and prepaid items.
The MCC Program is a potential significant tax benefit for you as a qualified first time home-buyer. Make sure to verify that your selected lender is approved to participate in the MCC Program and can qualify you for the program as part of your home purchase.
The HHFDC has just notified participating lenders that funds are available for application as of January 1, 2023 on a first come first served basis. Don’t miss your chance to obtain this beneficial tax credit. Ask your lender how to apply for the MCC Program at the time of your loan pre-approval! That way, the lender will have time to obtain everything they need to start preparing your MCC submission package once you have an accepted purchase agreement.
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