Mortgage Interest Credit
The federal government's mortgage interest credit provides another opportunity for first-time homebuyers to claim a tax break for the mortgage interest they paid. Unlike the mortgage interest deduction -- which reduces your taxable income -- this mortgage interest credit directly counts against your tax bill, lowering what you owe.
"It's a little-known but very cool program," said Deb Tomaro, a Bloomington, Ind.-based broker with RE/MAX Acclaimed Properties. "Depending on the purchase price of your home, a buyer can get 20 to 30 percent of the interest they pay every year back as a straight tax credit."
For example, imagine you prepare a return and find that you owe the IRS $1,000 in taxes. However, completing IRS Form 8396 for the mortgage interest credit shows that you're eligible for a $1,000 credit. In that situation, you can apply the credit and not owe the IRS anything.
The credit is not refundable, so you will not receive a check if the credit is larger than what you owe in taxes.
To be eligible, a state or local government must have issued you a Mortgage Credit Certificate. This typically occurs at the time you originate the mortgage. The certificate tells you how much interest you can claim as a credit. If you also claim a mortgage interest deduction, you must reduce the credit by that amount -- no double-dipping is allowed.
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