Page 160 - JoFA_2022

TAX MATTERS

To qualify for an MCC, besides being credit and the alternative minimum
required to use the home as a principal tax; less
residence, the taxpayer also must be a ■ The sum of the allowable nonrefund-
first-time homebuyer (someone who able personal tax credits, excluding
has not had an ownership interest in a the mortgage interest credit, the
principal residence in the previous three adoption expense credit, and the
years, with some exceptions — see Sec. residential energy-efficient property
143(d)(2)), meet certain income and credit.
sales price limits (which vary by state), The Credit Limit Worksheet in the
and, in some states, complete some type Form 8396 instructions can be used to
of pre-purchase homebuyer education. calculate the limit based on the taxpayer’s
An MCC is generally available to tax liability. As discussed below, the
Mortgage interest those seeking a conventional, Federal excess of the credit over this limit can be
credit aids first-time Housing Administration, Veterans Af- carried forward.
homebuyers fairs, or U.S. Department of Agricul- Example 1: A married couple
ture loan.
The subsidy improves purchase a home and obtain a
affordability for lower-income How the credit is calculated mortgage in the amount of $200,000,
families. The MCC provides two important with a 10-year term of equal monthly
amounts used in the calculation of a payments and a fixed 4% annual
By Travis Wheeler, CPA taxpayer’s mortgage interest credit: the interest rate. The couple receive an
certificate credit rate (CCR) and the MCC with a CCR of 30% from their
Many first-time homebuyers may be certified indebtedness amount. The state housing agency. The couple pay
unaware of the Sec. 25 mortgage interest CCR is a percentage used to calculate interest during the first year equaling
credit, which is designed to help low- to the taxpayer’s MCC. The minimum $7,698. The interest paid multiplied
middle-income families afford the cost of CCR that an MCC may provide is 10%, by the CCR ($7,698 × 30%) is
homeownership. Taxpayers who qualify and the maximum is 50%. The certified $2,309, but their mortgage interest
for the credit can claim it on their federal indebtedness amount is the amount of credit is limited to $2,000 because
income tax return for a portion of the the taxpayer’s mortgage loan covered by their CCR is over 20%.
mortgage interest they pay. the MCC. Only interest on this amount
qualifies for the credit. Carryforward of unused credit
Qualified taxpayers The mortgage interest credit for a Any mortgage interest credit in excess
To receive a mortgage interest credit, a tax year is calculated (on Form 8396, of the applicable tax limit can be carried
taxpayer must have been issued a mort- Mortgage Interest Credit) by multiplying forward for three years. However, if the
gage credit certificate (MCC). MCCs the mortgage interest the taxpayer paid taxpayer is subject to the $2,000 limit due
are issued by a state or local government or accrued for the tax year on the certified to the CCR being over 20%, the amount
agency in the taxpayer’s state of residence indebtedness amount. However, two lim- of the credit above $2,000 cannot be
that is authorized to issue qualified its may apply in calculating a taxpayer’s carried forward.
mortgage bonds (see Secs. 25(c) and 143) mortgage interest credit. The first limit is
but instead has elected to issue MCCs based on the taxpayer’s CCR. If the CCR Example 2: Assume the same facts as
through an MCC program in lieu of is more than 20%, the maximum allow- in the previous example, except that
some or all of the qualified mortgage able credit for a tax year is $2,000. the couple’s CCR is 20% and their
bonds the agency is authorized to issue. The second limit applies based on the applicable tax limit is $1,300. The
MCCs can be issued for debt incurred as taxpayer’s tax liability. The taxpayer’s total mortgage interest credit equals the
a qualified home improvement loan or a mortgage interest credit for each year interest paid multiplied by the CCR
qualified rehabilitation loan, but, gener- is limited to the “applicable tax limit,” ($7,698 × 20%), which is $1,540. The IMAGE BY YURIY ALTUKHOV/ISTOCK
ally, they are only issued in connection which is: $240 excess of the credit available
with a new mortgage for the purchase of ■ The taxpayer’s regular income tax over the applicable tax limit of $1,300
a taxpayer’s principal residence. liability reduced by the foreign tax is carried forward to the next year.

28 | Journal of Accountancy April 2022