IRS Form 8396: Mortgage Interest Credit – What It Is and How to Use It

IRS Form 8396: Mortgage Interest Credit is a tax form provided by the Internal Revenue Service (IRS) that allows eligible homeowners to claim the mortgage interest credit. This credit can reduce the tax liability of individuals who hold a Mortgage Credit Certificate (MCC).

Mortgage Credit Certificate (MCC)

To claim the mortgage interest credit, you must possess a Mortgage Credit Certificate (MCC) issued by a state or local government. An MCC is typically offered to low- to moderate-income first-time homebuyers to help make homeownership more affordable by providing a federal income tax credit for a portion of the mortgage interest paid.

Residence Requirement

The credit is only available for interest paid on the principal residence of the taxpayer. This means that if you move or change the use of your property (such as converting it to a rental property), you may no longer be eligible to claim this credit.

Completing Form 8396

• Part I: Current Year Mortgage Interest Credit

  • Calculate the annual mortgage interest credit using the total mortgage interest paid and the credit rate specified on your MCC.

• Part II: Credit Carryforward from Previous Years

  • If you were unable to use all of your mortgage interest credit in previous years, you can carry forward the unused amount to the current year.

• Submitting the Form

  • Attach Form 8396 to your 1040 tax return and include the total credit amount on the “Nonrefundable Credits” line.

Documentation Requirements

Ensure you maintain records of the MCC, the amount of mortgage interest paid, and calculations for the credit. The IRS may require you to provide documentation to verify your claim.

Credit Limitation

The mortgage interest credit is subject to limitations, including the amount of your tax liability. If the credit exceeds your tax liability, the excess amount can be carried forward to future years.

Recapture of Credit

If you sell your home within the first nine years of purchasing, you may be subject to recapture of some or all of the credit claimed. This recapture tax is meant to recover the uncollected taxes if the home is sold at a significant gain.

Related Terms

• Nonrefundable Credit: A type of tax credit that can reduce your tax liability to zero but cannot result in a refund.

• Tax Liability: The total amount of tax you owe to the IRS before credits and reductions.

• Principal Residence: The main home where a taxpayer lives for the majority of the year.

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