Internal Revenue Service Form 8396, Mortgage Interest Credit, allows you to claim a tax credit on the mortgage interest you paid in the current year on your main home. To qualify, you first must obtain a mortgage credit certificate from your state or local government. Certain rules limit who can take the credit and how much can be taken.
Read More: Tax Deadlines in 2021 for 2020 Tax Year
Enter Interest Paid
You use the first part of Form 8396 to calculate the current-year mortgage interest credit. Begin by entering the interest you paid during the year for the mortgage specified by the MCC. Normally, you use the amount reported on the copy of Form 1098, Mortgage Interest Statement, that you receive from your lender.
You'll have to prorate the interest if your mortgage loan exceeds the amount listed on the MCC. Do this my multiplying the total interest you paid by the ratio of the MCC loan amount to the original amount of your mortgage.
Figuring the Credit
Enter the credit rate shown on the MCC. If that rate is 20 percent or less, multiply it by the interest paid and enter the resulting pre-carryover credit. If the MCC credit rate exceeds 20 percent, you must cap the pre-carryover tax credit at $2,000.
If you refinanced the mortgage, you can still take the credit, providing you meet certain conditions: you receive a reissued MCC for the same property; the new MCC must entirely replace the previous one; the indebtedness and credit rate on the new MCC can't exceed those on the previous one; and the pre-carryover credit you figure using the new MCC doesn't exceed the pre-carryover credit you would have received on the previous MCC.
Read More: Tax Credits: What Are They & How Do You Qualify?
Adjusting the Credit
Add any credit carryovers – mortgage interest credits you didn't use in the previous three years – to the pre-carryover credit, giving you the calculated credit. Next, figure the credit limitation by filling out the Credit Limit Worksheet that accompanies the form. The worksheet allows you to figure your tax liability using information from other IRS Forms, including 1040, 5695, 8910, 8936 and Schedule R.
Your current year mortgage credit is the lesser of the calculated credit and the credit limitation. If the credit limitation is zero or less, enter zero for the current year mortgage credit and fill out Part II of Form 8396, where you carry forward the calculated credit.
Carrying the Credit Forward
Fill out Part II only if your current-year mortgage credit is smaller than your calculated credit, after adjusting for any credit limitation. Through a series of steps, you eliminate any carryover from three years previous and reallocate the remaining and new carryovers. When finished, you'll have the carryover amounts for the current year and up to two previous years.
Handling Schedule A
If you itemize your home mortgage interest as a deduction on Schedule A, you must reduce the amount of the deduction by the pre-carryover tax credit you calculated on Form 8396, even if you have to carry over a portion of the tax credit to later years. If you co-own the home with a non-spouse, you must divide the credit based on each person's percentage of ownership. All owners must be named by the MCC.
Knowing Non-Qualifying Certificates
You can't receive a mortgage interest credit if your MCC was issued by the Federal Housing Administration, Department of Veterans Affairs or Farmers Home Administration. In addition, Homestead Staff Exemption Certificates do not qualify for the tax credit.
Eric Bank is a senior business, finance and real estate writer, freelancing since 2002. He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans. Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get.com, badcredit.org and valuepenguin.com. Eric holds two Master's Degrees -- in Business Administration and in Finance. His website is ericbank.com.