The example assumes the taxpayer is married with two children and has an annual income of $60,000. The example also assumes the family purchases a home with a loan amount of $150,000 at a 4.00% interest paid the first year is approximately $6,000. An MCC tax credit of 35% of the interest paid would equal $2,100. (35% x $6,000 = $2,100). However, the maximum annual credit allowable is $2,000.
| With MCC | Without MCC | |
|---|---|---|
| Annual Income | $60,000 | $60,000 |
| Taxable Income | *$36,441 | **$34,441 |
| Tax From Table | $4,734 | $4,434 |
| Child Care Credit | ($2,000) | ($2,000) |
| MCC Credit | ($2,000) | $0 |
| Total Tax Liability | $734 | $2,434 |
*The Taxable Income is higher with the MCC because the mortgage interest deduction is reduced by the MCC amount (in this example $2,000), which reduces the total itemized deductions. Then you take the $2,000 credit off your tax liability.
**The Taxable income is lower without the MCC because the mortgage interest deduction is not reduced allowing the higher deduction, but no tax credit is taken.
The same taxpayer owes $1,700 less with an MCC than without one ($2,434 - $734 = $1,700). Remember that in this example $4,000 still qualifies as an itemized deduction.
The MCC will reduce the amount of federal income taxes otherwise due to the federal government from the homebuyer; however, the IRS will not pay out more than should have been paid in. Therefore, the benefit to the home owner in any one year cannot exceed the amount of federal taxes owned for that year, after other credits and deductions have been taken into account. Tax credit amounts not used in a given year may be carried forward in the next three subsequent years or until used, whichever comes first.