Low-income taxpayers who purchase a residence may be entitled to a federal income tax credit for part of their home mortgage interest paid each year. The credit is a direct dollar for dollar reduction of taxes owed. Generally, a qualifying principal residence may not cost more than 90 percent of the average area purchase price, but it can go as high as 110 percent in some targeted areas.

Who Qualifies for the Credit?

A taxpayer who obtains a mortgage credit certificate from his state or local government is eligible. To get the certificate, the taxpayer has to contact the appropriate government agency before obtaining a mortgage and buying a home. If the taxpayer refinances the original mortgage loan on which he had been given a mortgage credit certificate, he must get a new certificate to be able to claim a credit on the new loan.

Amount of Credit

If the taxpayer's mortgage is equal to or less than the loan amount shown on the mortgage credit certificate, the credit is calculated by multiplying the certified credit rate shown on the certificate by the interest paid during the year. If, on the other hand, the mortgage is larger than the loan shown on the certificate, the taxpayer must multiply the certified credit rate by only the interest allocated to the loan amount shown on the certificate.

If two or more persons other than a married couple filing a joint return hold an interest in a home to which a mortgage credit certificate relates, the credit must be divided based on the interest held by each person.

If the certificate credit rate is higher than 20 percent, the allowable credit cannot exceed $2,000.


The mortgage interest credit is nonrefundable, meaning that a taxpayer cannot get a refund if the credit exceeds his tax liability. However, the taxpayer is permitted to carry forward the unused portion of the credit to the next three tax years or until it is used up.

If the taxpayer's credit was limited to $2,000 because the certificate credit rate exceeded 20 percent, he is not allowed to carry forward any amount more than the $2,000.

Reduction of Mortgage Interest Deduction

If a taxpayer itemizes deductions and also takes a mortgage interest credit, he must reduce the home mortgage interest deduction by the current year mortgage interest credit. This reduction must be made even if part of the credit will be carried forward to a future tax year.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.