Real Estate and Taxes:

What is the Mortgage Interest Credit?

Under special state and local programs, your client may obtain a mortgage credit certification. This is a governmental program to provide taxpayers with financing to help them buy a principal residence. This certificate must be use in regards to the purchase, rehabilitation or home improvement of your client's main home.

If your client's mortgage is equal to or less than the amount of the loan shown on his/her mortgage credit certificate (MCC), use Form 8396, Mortgage Interest Credit, to calculate the rate of this credit by multiplying the certified credit rate on your client's MCC by all of the interest your client paid on their mortgage that year. If your client's mortgage is more than the amount of the loan shown on their MCC, your client multiplies the certified credit by only the interest allocated to the loan on their MCC. Should their credit rate be more than 20%, your client may only claim up to $2,000 as credit on their tax return.

If your client's allowable credit is more than their tax liability reduced by certain credits, they may carry the remaining unused portion forward for the next three tax years or until it has been used. However, if they are subject to the $2,000 limit due to the fact that they have a credit rate of over 20%, any amount over $2,000 may not be carried forward.

If your client chooses to itemize their deductions using Schedule A instead of taking the standard deduction for their filing status, they must reduce their home mortgage interest deduction by the amount on line 3 of Form 8396.