Under special state and local programs, you may obtain a “mortgage credit certificate” to finance the purchase of a principal residence or to borrow funds for certain home improvements. Generally, a qualifying principal residence may not cost more than 90% of the average area purchase price, 110% in certain targeted areas. A tax credit for interest paid on the mortgage may be claimed. The credit is computed on Form 8396 and claimed on Form 1040. The credit equals the interest paid multiplied by the certificate rate set by the governmental authority, but if the credit rate is over 20%, the credit is limited to $2,000.
The mortgage interest credit is subject to a tax liability limit and any excess is nonrefundable. The tax liability limitation is figured on Form 8396. However, if your allowable credit exceeds the liability limitation, the unused credit can be carried forward for up to three years.
If you itemize deductions, you must reduce your home mortgage interest deduction (15.1) by the tentative (prior to liability limit) mortgage interest credit shown on Line 3 of Form 8396 (certificate credit rate multiplied by interest paid, subject to the $2,000 limit). The reduction to the mortgage interest deduction applies even if part of the Line 3 credit is carried forward to the next tax year.
3.147.42.129