Mortgage Tax Credits & Deductions Available for First-Time Home Buyers

Shopping for a new home comes with a lot of complications in the form of tax credits, deductions, and the money you save in the long run. By gaining an understanding of tax options, you can learn how to save a lot and cut down the initial costs of your home purchase.

As a first-time home buyer, you do not want to miss out on opportunities to save thousands of dollars with your new home purchase. Check out some of the tax credits and deductions that could make a big difference on the total cost you pay for a home.

Mortgage Credit Certificate

One of the first tax credits you should look into for a new home is the mortgage credit certificate. Also known as the MCC, the credit is a program available for first-time home buyers and will give them a direct tax credit option when they file taxes.

The calculation of the credit is based on how much interest you pay in the first year, with a maximum cap set at $2,000. The credit is a direct way to lower your tax liability and can result in a larger refund or no taxes owed depending on your financial situation.

The MCC is set up on a state-by-state basis. The qualifications depend on your income level and the state you're getting the mortgage in. On average, most states will offer the MCC on a 20% basis, meaning you would have to pay $10,000 in annual interest to reach the maximum $2,000 in credit.

A mortgage specialist can break down your income level and qualifications to see if you're eligible for the tax credit within your state.

Mortgage Loan Interest Deduction

While the MCC only covers the first year of your mortgage, you can still count on deductions for the interest you paid in future years. A standard deduction will typically cover a lot of costs, but if you have a lot of mortgage interest payments, then you may consider a mortgage loan interest deduction. To claim this deduction, you’ll calculate an itemized deduction on your taxes.

The mortgage loan interest deduction allows you to deduct the total interest paid from your taxable income on up $750,000 of your home mortgage. So, if you paid $18,000 in interest for the tax year on a $700,000 home, then you can deduct the full amount on your taxes. If your home costs more, you’ll be able to recoup some but not all of the interest paid.

As you go through the mortgage process, a broker can break down the details and possible savings. In many cases, you may not need to file for the interest deduction if the standard deduction is much higher than your itemized calculation.

Investment Tax Credit

As you plan to move into a new home, you may consider some upgrades and changes to the property. If you are looking into adding solar panels to the home, then you can qualify for the investment tax credit. The credit is aimed at increasing the use of solar energy and providing direct benefits for installations.

The tax credit originally began at 30% of the installation costs but has lowered to 26% for 2020. In 2021, the percentage goes down to 22, with a permanent 10% tax credit set for 2022 and beyond. If you take advantage of the investment tax credit quicker, you can save more money.

The use of a credit means you will get the money directly back as a refund rather than just a deduction off your taxable income. If you have the solar panels installed just before you move in, the process will be easier and you won't have to deal with a lot of disruptions in the new home.

Start the mortgage process with our trained professionals at Cornerstone Residential Mortgage. We will help you find a mortgage and offer services to ensure you get all of the tax credits and deductions you need to save money.