The mortgage interest credit is a credit against tax for a homeowner who holds a mortgage credit certificate issued by a state or local government. It reduces tax directly rather than reducing taxable income, which is what separates it from the far more common mortgage interest deduction set out in the mortgage interest deduction.
The computation is a product of two things. There shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the product of the certificate credit rate and the interest paid or accrued by the taxpayer during the taxable year on the remaining principal of the certified indebtedness amount (26 U.S.C. 25(a)(1)). Neither factor is chosen by the taxpayer at filing time. Both the rate and the certified indebtedness amount are figures the certificate itself specifies.
The Cap Is Conditional, Not General
This is the limb most secondary sources drop. The dollar ceiling does not apply to every certificate. If the certificate credit rate exceeds 20 percent, the amount of the credit allowed to the taxpayer under paragraph (1) for any taxable year shall not exceed $2,000 (26 U.S.C. 25(a)(2)(A)). A certificate written at or below that rate is not capped by that sentence at all.
Where the house has more than one owner the ceiling is shared. If 2 or more persons hold interests in any residence, the limitation of subparagraph (A) shall be allocated among such persons in proportion to their respective interests in the residence (26 U.S.C. 25(a)(2)(B)).
The Two Defined Terms the Certificate Supplies
The term certificate credit rate means the rate of the credit allowable by this section which is specified in the mortgage credit certificate (26 U.S.C. 25(b)(1)).
The certified indebtedness amount is narrower than a mortgage balance. It means the amount of indebtedness which is incurred by the taxpayer to acquire the taxpayer’s principal residence, or as a qualified home improvement loan with respect to that residence, or as a qualified rehabilitation loan with respect to that residence, and which is specified in the mortgage credit certificate (26 U.S.C. 25(b)(2)). Three kinds of borrowing qualify, and the figure that counts is the one the certificate specifies rather than the loan balance.
Principal residence is not defined afresh here. The term has the same meaning as when used in section 121 (26 U.S.C. 25(e)(7)), which is the section behind the home sale capital gain exclusion.
What Makes a Certificate a Mortgage Credit Certificate
The statute lists four requirements, and all of them have to hold. The certificate has to be issued under a qualified mortgage credit certificate program by the State or political subdivision having the authority to issue a qualified mortgage bond to provide financing on the principal residence of the taxpayer, be issued to the taxpayer in connection with the acquisition, qualified rehabilitation, or qualified home improvement of the taxpayer’s principal residence, specify both the certificate credit rate and the certified indebtedness amount, and be in such form as the Secretary may prescribe (26 U.S.C. 25(c)(1)).
The program behind it is itself defined, and the definition is long. Among other conditions, the issuing authority has to elect not to issue an amount of private activity bonds it may otherwise issue, the certified indebtedness has to meet named residence, three-year, purchase price, income and targeted area requirements borrowed from section 143, and no certificate may be issued for a residence any of whose financing came from the proceeds of a qualified mortgage bond or a qualified veterans’ mortgage bond (26 U.S.C. 25(c)(2)(A)).
Taking the Credit Shrinks the Deduction
The two are not additive on the same interest, and the reduction is written into the deduction rather than into the credit. The amount of the deduction under this section for interest paid or accrued during any taxable year on indebtedness with respect to which a mortgage credit certificate has been issued under section 25 shall be reduced by the amount of the credit allowable with respect to such interest under section 25, determined without regard to section 26 (26 U.S.C. 163(g)).
Unused Credit Carries Forward
The credit is bounded by a tax limit, and what cannot be used in one year is not simply lost. If the credit allowable under subsection (a) for any taxable year exceeds the applicable tax limit for such taxable year, such excess shall be a carryover to each of the 3 succeeding taxable years and, subject to the limitations of subparagraph (B), shall be added to the credit allowable by subsection (a) for such succeeding taxable year (26 U.S.C. 25(e)(1)(A)).
The limit the carryforward is measured against is defined rather than assumed. The term applicable tax limit means the limitation imposed by section 26(a) for the taxable year reduced by the sum of the credits allowable under this subpart, other than this section and sections 23 and 25D (26 U.S.C. 25(e)(1)(C)).
When the Certificate Stops Working
A certificate is not permanent, and two events end it. Except as provided in subparagraph (B), a mortgage credit certificate shall be treated as in effect with respect to interest attributable to the period beginning on the date the certificate is issued and ending on the earlier of the date on which the certificate is revoked by the issuing authority, or the residence to which the certificate relates ceases to be the principal residence of the individual to whom the certificate relates (26 U.S.C. 25(e)(3)(A)).
There is also a deadline on the borrowing itself. A certificate shall not apply to any indebtedness which is incurred after the close of the second calendar year following the calendar year for which the issuing authority made the applicable election under subsection (c)(2)(A)(ii) (26 U.S.C. 25(e)(3)(B)).
Common Questions
No, and a client holding a certificate has both in play at once. The credit is computed as a rate times qualifying interest and applied against tax (26 U.S.C. 25(a)(1)), while the deduction reduces taxable income and is set out in the mortgage interest deduction. Taking the credit reduces the deduction on the same interest (26 U.S.C. 163(g)), so the return has to carry both moves.
No. No credit shall be allowed under subsection (a) for any interest paid or accrued to a person who is a related person to the taxpayer, within the meaning of section 144(a)(3)(A) (26 U.S.C. 25(e)(6)).
The credit is not available, regardless of what the certificate says. Subsection (a) shall not apply to any indebtedness if all the requirements of subsections (c)(1), (d), (e), (f) and (i) of section 143, and clauses (iv), (v) and (vii) of subsection (c)(2)(A), were not in fact met with respect to that indebtedness, though except to the extent provided in regulations those requirements shall be treated as met if there is a certification, under penalty of perjury, that they are met (26 U.S.C. 25(e)(2)).
The Secretary may prescribe regulations allowing the administrator of a program to reissue a certificate specifying a certified mortgage indebtedness that replaces the outstanding balance on the original certificate, under terms designed to ensure that the credit allowable on the reissued certificate is equal to or less than the credit that would have been allowable on the original (26 U.S.C. 25(e)(4)). The ceiling on the reissued certificate is therefore the old credit, not a fresh one.
Accountably places offshore accountants and tax preparers inside US CPA and EA firms, working in the firm’s own systems and under the firm’s own review. A certificate holder’s return needs the credit computed, the deduction reduced and the carryforward tracked across years, which is exactly the kind of schedule work a reviewed offshore preparer can carry through a filing season.
