b. Income Tax Credits from Mortgage Credit Certificates

Mortgage Credit Certificates (MCCs) issued by state and local governments may qualify a borrower for a Federal tax credit.  The Federal tax credit is based on a certain percentage of the borrower’s mortgage interest payment.

Lenders must provide a copy of the MCC to VA with the loan package which indicates

·   the percentage to be used to calculate the tax credit, and

·   the amount of the certified indebtedness.

The certified indebtedness can be comprised of a loan incurred by the veteran to acquire a principal residence or a qualified home improvement or rehabilitation loan.

If the percentage on the MCC is more than 20%, there is an annual limit on the tax credit equal to the lesser of $2,000 or the borrower’s maximum tax liability.  Calculate the tax credit by applying the specified percentage to the interest paid on the certified indebtedness.  Then apply the annual limit.

Example:  The MCC shows a 30 percent rate and $100,000 certified indebtedness.  The borrower will pay approximately $8,000 in annual mortgage interest.  Borrower’s estimated total Federal income tax liability is $9,000.  Calculate the tax credit as follows:

·   30% of $8,000 = $2,400

·   Apply the annual $2,000 limit

·   The tax credit will be $2,000

·   Use $167 (one-twelfth of $2,000) in the monthly analysis.

Note:  If the mortgage on which the borrower pays interest is greater than the amount of certified indebtedness, limit the interest used in the tax credit calculation to that portion attributable to the certified indebtedness.