The example below, 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 for $120,000 at a 6.00% interest rate. Interest paid the first year is approximately $7,200. An MCC tax credit of 35% of the interest paid would equal $2,520. (30% x $7,200 = $2,520). However, the maximum annual credit allowable is $2,000.

The same taxpayer owes $1,700 less with an MCC than without one ($2,434-$734=$1,700). Remember that in this example $5,200 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 owed 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 into the next three subsequent years or until used, whichever comes first.