How to Prepare IRS Form 8396

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.

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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.

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.

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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.

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​.

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.

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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.