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The Texas $60,000 Mortgage Credit Certificate (MCC) program was created to help make ownership of new and existing homes more affordable for homebuyers and increase the home ownership rate. The MCC can be combined with  the $7,500 Federal Tax Credit Program until June 30, 2009.

So, what’s the MCC program? It allows the home buyer to claim a tax credit for some portion of the mortgage interest paid for each year. It’s a dollar for dollar reduction against the federal tax liability.

And, who’s eligible to receive the MCC? It’s open to those who:

1) meet income and home purchase requirements;

2) have not owned a home as a primary residence during the past 3 years. In targeted areas, there is no first time home buyer requirement and higher income and home price levels.

3) meet the qualifying requirements of the mortgage loan

4) will use the  home as a primary residence

The size of the annual tax credit will be up to 30% of the annual interest paid on the mortgage loan. There will be a maximum amount of $2,000 per year for each of the 30 years while occupying the home as your primary residence. The credit can not be larger than the actual annual tax liability after all other credits and deductions are factored into the calculations. Any excess can be carried forward for the next 3 years.

Each year, the calculation will be based upon the amount of interest paid. The W-4 withholding can be adjusted to allow for the credit throughout the year. IRS form 8396 will be filed with the tax return.

A tax credit is a direct reduction in the amount of tax owed to the IRS. A tax deduction will reduce the amount of income that is taxed. So, if you have $10,000 in tax liability, the credit would reduce it by $2,000. Whereas, a deduction of $2,000 will reduce the taxable income to $8,000. At a 25% marginal tax bracket, the deduction will be a $500.00 difference. (that is 25% of $2,000=$500.00) So, a credit is more beneficial than the deduction.

There are fees involved in addition to the other closing costs….$75.00 commitment fee and 1.00% of the loan amount as an Issuance Fee.

Tom Frey  Custom Mortgage Group  Austin, Tx.  www.HotHomeLoans.com