Adjusting Your Withholding for the Mortgage Credit Certificate Tax Credit

As a new home owner with the Mortgage Credit Certificate (MCC), you will likely save a TON of money with the tax credit. Here’s how to adjust your withholding.


Disclaimer: The information presented on this website is only a basic introduction to the Mortgage Credit Certificate and to tax withholding. We strongly recommend that you hire a professional to help you. The information provided here does not replace the IRS instructions for filing taxes. Incorrect filings could lead to large tax bills and penalties. Please hire a CPA or an EA to prepare and file your tax returns.

Introduction to the Mortgage Credit Certificate and the MCC Tax Credit

Congratulations on being a holder of the Mortgage Credit Certificate. You now have a HUGE tax advantage, and this now even more beneficial with the 2018 Tax Cuts and Jobs Act (the new tax code).

Home owners without the MCC are limited to an itemized deduction. A deduction only saves an amount equal to your deduction multiplied by your tax rate. For example, if you have a $10,000 deduction and you are in a 20% tax bracket, you only get a tax savings of $2000.

Mortgage interest as an itemized deduction has lost even more value now that the new tax code doubles the standard deduction.

On the other hand, those holding the Mortgage Credit certificate, get a “dollar for dollar” tax credit.

A tax credit is as good as cash money.

Not only that, but even after you use 100% of your mortgage interest toward the credit, you can then take most of the interest and write it off too.

You are now (legally)  double dipping!

I’m surprised policy makers allowed such an advantage. I’ts almost as if they didn’t know or understand the tax concept.

Treat your certificate like gold. Your tax preparer will need info from it to claim your credit. I recommend giving him or her a copy and not letting the original out of your site.

Changing your paycheck withholding to compensate for the Mortgage Credit Certificate

Now that you have the Mortgage Credit Certificate in your hands, you will likely pay much less in less tax.

mortgage credit certificate withholdingWhen you pay less tax, you can either opt for a bigger paycheck, a bigger refund (or a smaller balance due) when you file your taxes, or a combination of both.

It is important to realize that regardless of how you change your withholding, you will not pay anymore or less in taxes. If your total tax liability is $15,000, in other words, then that is what you will pay in federal tax for the year regardless of your paycheck withholding.

For example: If you withhold $1000 out of each paycheck, and you are paid twice a month, you will have paid $24,000 in tax throughout the year. If you only owe $15,000 in tax for the year when your taxes are prepared, you will get a $9,000 refund.

In another example, if you withhold $500 out of your semi-monthly paycheck, you will have paid $12,000 throughout the year. If your tax liability is $15,000, you will have a balance due of $3000 when you file your taxes.

Notice that either way you are paying a total of $15,000 – the question is just “when do you want to pay it”.

(Note that if you underpay by more than $1,000, the IRS will charge you interest).

The two schools of thought on tax withholding

Many taxpayers, and most financial professionals, prefer to zero out there taxes at the end of the year. By that I mean they like to withhold “just the correct amount” to where when they file taxes, they have a nearly zero refund or balance due.

This is because they resent giving the government an interest-free loan. They figure that they want their money “right now” to invest and to use for personal reasons.

Other taxpayers prefer a big refund at the end of the year. They don’t miss the small amount of extra money in each check, they would just spend the money on life’s endless expenses anyway, and they are not concerned about the “lost interest opportunity”. After all, how much float are you losing on a few thousand per year.

It’s like a forced savings plan to them, and when they receive their refund they take the family to Disney or Yosemite. Trips that they would never otherwise be disciplined enough for which to save.

How you choose to work this is totally up to you.

You should you adjust your withholding now that you have the MCC?

First remember that no matter what you do, you will pay the same total of income tax for the year (see above).

Now, if you are the type that wants a big refund, than don’t do anything to your paycheck withholding. You will get a larger than usual refund every year and you can utilize your lump sum however you like.

If you do not want a big refund, however, you have 2 options:

Option 1 is to be aggressive. Choose this option if you want a much bigger paycheck and you don’t mind a bit of a balance at tax time. To execute this option, increase your withholding exclusions by +2. So if you are claiming “1” exclusion on your W4, change it to 3. If you are claiming 3, change it to 5. Talk to your payroll or HR department about updating your W4.

Option 2 is to be balanced. Choose this option if you want a bigger paycheck and you still want some sort of refund at the end of the year. If this is what you prefer, change your withholding exclusion by +1. SO if you are claiming “1”, change it to “2”

Please understand that these are quick rules of thumb. If you really want to nail down exactly what to claim for your personal situation, contact your tax professional. If you do not have one, you can hire us to do some more precise tax planning for you. We generally charge $150 plus tax to compute this for non-clients. You can contact us here.

The Mortgage Certificate Credit is non-refundable

You may have heard this term. Does this mean you can’t get a refund and you will lose your withholding?

No it does not!

“Non refundable credit” is a technical tax term that does not mean exactly what it sounds like it means.

A non refundable credit only indicates that if you don’t have any tax liability to begin with, then you can’t turn the credit into cash.

I want to make it very clear that this term does NOT mean you will lose any withholding because you can’t get a refund.

State Withholding

Adjusting your state exclusions is tricky, because there is seldom, if ever, a state mortgage credit for your certificate. Also, you may or may not be able to write off your mortgage interest on your state income taxes. It depends on the state and other factors.

My official advice is to hire a tax professional to help you calculate the exact amount.

If you don’t want to spend the money on that, I get it.

Unofficially then, in that case, I suggest not changing anything at first and see at tax time if your refund is “too big”. If it does increase significantly from home ownership, adjust it by 1 each year until you are satisfied.

Recapture of the Mortgage Credit

If you turn around and sell your home in a certain amount of time, and you earn a certain amount of money, and you make a certain amount of capital gains on the sale, you may have to pay back some or all of the credit you took with the MCC.

This part of the tax code is extremely complicated. You can read the instructions here but I really think it’s time to hire a tax professional if this happens.

Here are some link that you might find helpful:

Realtors: How to explain capital gains tax to your clients

Online tax professionals – Our Home Page

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