IRS Form 8396 – Mortgage Interest Credit

IRS Form 8396 – The Mortgage Interest Credit is a valuable tax benefit designed to help lower-income homeowners reduce their federal income tax liability. If you’ve received a qualified Mortgage Credit Certificate (MCC) from a state or local government, IRS Form 8396 allows you to calculate and claim this credit for the 2025 tax year (filed in 2026). This SEO-optimized guide explains everything you need to know about Form 8396, including eligibility, how to file, and key limitations. We’ll draw from official IRS sources to ensure accuracy and provide practical tips for maximizing your savings.

What Is the Mortgage Interest Credit?

The Mortgage Interest Credit provides a direct reduction in your federal income tax based on a portion of the mortgage interest you pay on your home loan. Unlike a deduction, which reduces your taxable income, this is a non-refundable credit that lowers your tax bill dollar-for-dollar, up to your tax liability. It’s administered through state or local housing programs and aims to make homeownership more affordable for first-time buyers or those in targeted areas.

Key features include:

  • Credit Rate: Typically between 10% and 50% of your qualified mortgage interest, as specified on your MCC.
  • Carryforward Option: Unused portions can be carried forward for up to three years.
  • Integration with Deductions: You must reduce your itemized mortgage interest deduction on Schedule A (Form 1040) by the credit amount claimed.

This credit is particularly beneficial if your tax liability is low, as it can create carryforwards for future years when your income might be higher.

Eligibility for the Mortgage Interest Credit

To qualify for the credit using Form 8396, you must meet specific criteria set by the IRS and the issuing agency:

  • Possess a Qualified MCC: Issued by a state or local governmental unit under an approved mortgage credit certificate program. Note that certificates from federal agencies like the FHA, VA, or Farmers Home Administration do not qualify.
  • Main Home Requirement: The home must be your primary residence and located within the jurisdiction of the issuing authority.
  • No Related-Party Interest: Interest paid to a related person (e.g., family member) disqualifies the credit.
  • Income and Purchase Price Limits: These vary by program but often target low- to moderate-income buyers. Contact your local housing finance agency for details.

The MCC specifies the certified indebtedness amount (the portion of your loan eligible for the credit) and the credit rate. If your actual mortgage exceeds this amount, you’ll allocate the interest proportionally.

How to Obtain a Mortgage Credit Certificate (MCC)?

MCCs are typically issued in connection with a new mortgage for purchasing your main home. Here’s how to get one:

  1. Research local programs through your state or local housing finance agency.
  2. Apply before closing on your mortgage—lenders often assist with this process.
  3. Meet program-specific requirements, such as being a first-time homebuyer or buying in a designated area.

Once issued, the MCC remains valid as long as you occupy the home as your primary residence and maintain the original loan terms (or refinance under specific rules).

Step-by-Step Guide: How to Fill Out IRS Form 8396

Form 8396 is straightforward but requires careful calculation. Attach it to your Form 1040, 1040-SR, or 1040-NR. Before starting Part I, calculate any other credits like the Credit for the Elderly or the Disabled, Alternative Motor Vehicle Credit, or Qualified Plug-in Electric Drive Motor Vehicle Credit.

Part I: Current-Year Mortgage Interest Credit

  • Line 1: Enter your share of interest paid on the certified indebtedness amount. Use Form 1098 or allocate if your mortgage exceeds the MCC amount (e.g., interest paid × (certified amount / total mortgage)).
  • Line 2: Input the certificate credit rate from your MCC (not your mortgage interest rate).
  • Line 3: If rate ≤ 20%, multiply Line 1 by Line 2. If > 20%, cap at $2,000 (or prorated share if multiple owners). For refinances, see special rules. Reduce your Schedule A deduction by this amount.
  • Lines 4-6: Enter carryforwards from prior years’ Form 8396.
  • Line 7: Sum Lines 3-6.
  • Line 8: Use the Credit Limit Worksheet to enter your tax liability limit (Form 1040 Line 18 minus certain other credits).
  • Line 9: Smaller of Line 7 or 8. Report on Schedule 3 (Form 1040), Line 6g.

Credit Limit Worksheet (Keep for Records)

  1. Enter Form 1040 Line 18.
  2. Sum specified other credits (e.g., Schedule 3 Lines 1-4, etc.).
  3. Subtract Line 2 from Line 1; enter on Form 8396 Line 8.

Part II: Mortgage Interest Credit Carryforward to 2026

Complete if Line 9 < Line 7:

  • Lines 10-17: Calculate carryforwards by prioritizing current-year credit, then oldest carryforwards. Cap any excess over $2,000 (if rate > 20%)—it cannot be carried forward.

Limitations and Carryforwards Explained

  • Tax Liability Limit: The credit cannot exceed your net tax after other non-refundable credits.
  • $2,000 Cap: Applies if credit rate > 20%; prorated for multiple owners.
  • Carryforward Rules: Unused credit (due to tax liability limit) carries forward up to three years. Excess from the $2,000 cap is forfeited.

Special Situations: Refinancing and Selling Your Home

  • Refinancing: Obtain a reissued MCC that replaces the original without increasing the credit amount or rate. In the refinance year, combine interest from old and new loans; attach a statement if rates differ.
  • Selling Within 9 Years: You may need to recapture part of the credit using Form 8828. This applies if the home was purchased after 1990 with an MCC.

Impact on Your Mortgage Interest Deduction

If you itemize, subtract the Line 3 amount from your deductible mortgage interest on Schedule A, even if some credit is carried forward. This prevents double-dipping on tax benefits.

Where to Download IRS Form 8396?

You can download the latest PDF version of Form 8396 directly from the IRS website: https://www.irs.gov/pub/irs-pdf/f8396.pdf. For additional guidance, refer to IRS Publication 530, Tax Information for Homeowners.

Conclusion: Maximize Your Tax Savings with Form 8396

Claiming the Mortgage Interest Credit via IRS Form 8396 can significantly lower your tax burden, especially for new homeowners. Ensure you have a valid MCC and double-check calculations to avoid errors. If you’re unsure about eligibility or complex scenarios like refinancing, consult a tax professional or visit IRS.gov for free resources. By understanding and properly filing this form, you can make the most of this homeowner incentive in 2026.