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IRS.gov Website
Publication 530
taxmap/pubs/p530-001.htm#en_us_publink100011905

Mortgage Interest Credit(p8)

rule
The mortgage interest credit is intended to help lower-income individuals afford home ownership. If you qualify, you can claim the credit on Form 8396 each year for part of the home mortgage interest you pay.
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Who qualifies. (p8)

rule
You may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government. Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home.
The MCC will show the certificate credit rate you will use to figure your credit. It also will show the certified indebtedness amount. Only the interest on that amount qualifies for the credit. See Figuring the Credit, later.
Tax Tip
You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. Contact your state or local housing finance agency for information about the availability of MCCs in your area.
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How to claim the credit.(p8)

rule
To claim the credit, complete Form 8396 and attach it to your Form 1040 or Form 1040NR, U.S. Nonresident Alien Income Tax Return. Include the credit in your total for Form 1040, line 53, or Form 1040NR, line 50; be sure to check box c and write "Form 8396" on that line.
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Reducing your home mortgage interest deduction.(p8)

rule
If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. You must do this even if part of that amount is to be carried forward to 2014.
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Selling your home.(p8)

rule
If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program. For additional information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, in Publication 523.
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Figuring the Credit(p8)

rule
Figure your credit on Form 8396.
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Mortgage not more than certified indebtedness.(p8)

rule
If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year.
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Mortgage more than certified indebtedness.(p9)

rule
If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction.
Certified indebtedness amount on your MCC
Original amount of your mortgage
The fraction will not change as long as you are entitled to take the mortgage interest credit.
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Example.(p9)

Emily bought a home this year. Her mortgage loan is $125,000. The certified indebtedness amount on her MCC is $100,000. She paid $7,500 interest this year. Emily figures the interest to enter on Form 8396, line 1, as follows:
  $100,000 =80%(.80)  
 $125,000  
 $7,500x.80=$6,000 
Emily enters $6,000 on Form 8396, line 1. In each later year, she will figure her credit using only 80% of the interest she pays for that year.
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Limits(p9)

rule
Two limits may apply to your credit.
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Limit based on credit rate.(p9)

rule
If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000.
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Limit based on tax.(p9)

rule
After applying the limit based on the credit rate, your credit generally cannot be more than your tax liability. See the Credit Limit Worksheet in the Form 8396 instructions to calculate the limit based on tax.
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Dividing the Credit(p9)

rule
If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided based on the interest held by each person.
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Example.(p9)

John and his brother, George, were issued an MCC. They used it to get a mortgage on their main home. John has a 60% ownership interest in the home, and George has a 40% ownership interest in the home. John paid $5,400 mortgage interest this year and George paid $3,600.
The MCC shows a credit rate of 25% and a certified indebtedness amount of $130,000. The loan amount (mortgage) on their home is $120,000. The credit is limited to $2,000 because the credit rate is more than 20%.
John figures the credit by multiplying the mortgage interest he paid this year ($5,400) by the certificate credit rate (25%) for a total of $1,350. His credit is limited to $1,200 ($2,000 × 60%).
George figures the credit by multiplying the mortgage interest he paid this year ($3,600) by the certificate credit rate (25%) for a total of $900. His credit is limited to $800 ($2,000 × 40%).
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Carryforward(p9)

rule
If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first.
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Example.(p9)

You receive a mortgage credit certificate from State X. This year, your regular tax liability is $1,100, you owe no alternative minimum tax, and your mortgage interest credit is $1,700. You claim no other credits. Your unused mortgage interest credit for this year is $600 ($1,700 − $1,100). You can carry forward this amount to the next 3 years or until used, whichever comes first.
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Credit rate more than 20%.(p9)

rule
If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit).
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Example.(p9)

In the earlier example under Dividing the Credit, John and George used the entire $2,000 credit. The excess
 John $1,350 − $1,200=$150 
 George$900 − $800=$100 
$150 for John ($1,350 − $1,200) and $100 for George ($900 − $800) cannot be carried forward to future years, despite the respective tax liabilities for John and George.
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Refinancing(p9)

rule
If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. The amount of credit you can claim on the new loan may change. Table 2 below summarizes how to figure your credit if you refinance your original mortgage loan. taxmap/pubs/p530-001.htm#w15058k99
Pencil

Table 2. Effect of Refinancing on Your Credit

IF you get a new (reissued) MCC and the amount of your new mortgage is ...THEN the interest you claim on Form 8396, line 1, is* ...
smaller than or equal to the certified indebtedness amount on the new MCCall the interest paid during the year on your new mortgage.
larger than the certified indebtedness amount on the new MCCinterest paid during the year on your new mortgage multiplied by the following fraction.
  
  certified indebtedness
amount on your new MCC
 
  original amount of your
mortgage
 
*The credit using the new MCC cannot be more than the credit using the old MCC.
 See New MCC cannot increase your credit above.
An issuer may reissue an MCC after you refinance your mortgage. If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC.
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Year of refinancing.(p9)

rule
In the year of refinancing, add the applicable amount of interest paid on the old mortgage and the applicable amount of interest paid on the new mortgage, and enter the total on Form 8396, line 1.
If your new MCC has a credit rate different from the rate on the old MCC, you must attach a statement to Form 8396. The statement must show the calculation for lines 1, 2, and 3 for the part of the year when the old MCC was in effect. It must show a separate calculation for the part of the year when the new MCC was in effect. Combine the amounts from both calculations for line 3, enter the total on line 3 of the form, and write "See attached" on the dotted line next to line 2.
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New MCC cannot increase your credit.(p9)

rule
The credit that you claim with your new MCC cannot be more than the credit that you could have claimed with your old MCC.
In most cases, the agency that issues your new MCC will make sure that it does not increase your credit. However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. In that case, you will need to know the amount of the credit you could have claimed using the old MCC.
There are two methods for figuring the credit you could have claimed. Under one method, you figure the actual credit that would have been allowed. This means you use the credit rate on the old MCC and the interest you would have paid on the old loan.
If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. Under this method, you figure the credit using a payment schedule of a hypothetical self-amortizing mortgage with level payments projected to the final maturity date of the old mortgage. The interest rate of the hypothetical mortgage is the annual percentage rate (APR) of the new mortgage for purposes of the Federal Truth in Lending Act. The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC.
EIC
You must choose one method and use it consistently beginning with the first tax year for which you claim the credit based on the new MCC.
Tax Tip
As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage.