There are 3 types of tax credits that are created for low-income homeowners: Mortgage Interest Credit, Resident Efficiency Property Credit, and Low-Income Housing Credits.
Mortgage Interest Credit
The buyer of a new home whose income is below the middle income is eligible for mortgage interest tax credit. The credit is oriented to help the individuals with lower income to afford their own home. A tax credit is allowed for every single year for 40% of the home mortgage interest that is paid by the homeowner. If the mortgage loan is equal or smaller than the amount that is shown on the MCC, the homeowner can take all the interest paid to the calculation. But the homeowner can only claim the part of the interest for credit if the mortgage loan is greater than the certified amount on the MCC. If the certificate credit rate is higher than 20%, then the limitation of $2000 is applicable. Any deduction of the mortgage interest is reduced by the amount of the credit taken. Additionally, the credit cannot access the federal income tax liability; the excess part may carry forward for 3 years.
In order to be eligible for the credit, the buyer must provide a mortgage credit certificate (MCC), issued by the state or local government. Generally, an MCC is issued only in connection with a new mortgage used for the purchase of a primary home and most homeowners miss this opportunity simply because they don’t know about such credit. If the homeowner sells their house within 9 years of purchase, they will have to pay back part of the benefit they have received through this program.
The deduction of mortgage interest in buying homes is a very important factor that promotes the ownership of homes. Similar to the mortgage interest credit, the main difference is that most claims for mortgage interest credit are made by a comparatively small group of citizens, because for most low-income families, they either don’t have enough educational background in cognitive the law or do not have enough tax liability to absorb such credit.
Resident Efficiency Property Credit Residential energy efficient property credit was executed in the late 1970s, however, got expired in 1985. The credit was enacted as Energy Policy Act of 2005, and also become part of the American Recovery and Reinvestment Act of 2009. It kept revising and expanded from 2011 through 2014. Currently, this energy-efficient credit was modified for 2015 and 2016.
Under 26 U.S. Code § 25D - Residential energy efficient property, individual is allowed to have a credit of 30 percent of costs, including installation, on qualified energy-efficient properties. The qualified properties include solar electric systems, solar water heaters, fuel cell properties, small wind energy properties, and geothermal heat pumps. Most of the equipment has limited amount of tax credit, and the credits can carry over to the next year’s tax return. However, for fuel cell properties, the amount is limited to $500 for each one-half kilowatt of capacity of the property.
The taxpayer can use Form 5695 to claim the credit and it is available through 2016. As the consumption of energy rises, the energy efficient property can help people to reduce their bill, and also reduce the environmental pollution. However, there are some barriers for people installing the energy efficient properties. Cost-benefit could be the main reason for stopping the people having those properties. Therefore, the purpose of the Residential energy efficient property credit is to create incentive and direct deposit for people and give more encouragements and motivations to install the energy efficient properties.
The other reason for not having an energy-efficient property is the electricity price. It is high enough for people to consider having the energy-efficient property. If the energy price is not expensive, people do not motivate to use a high technology to lower their bills.
The credit of residential energy efficient property focuses on individuals and households who can take their own decision to invest in the energy-efficient properties. Homeowners would have more ability to afford the cost because they are more likely to earn a higher income than the people who are living in rented homes. Most of the people who claim the credit are with AGI above $50,000, which indicates that the people who are at lower income levels have less possibility to claim the credit due to the high costs of the property. Therefore, this credit tends to be more bound with higher income taxpayers.
Low-Income Housing Credits
According to the IRC §42, Congress approves the Low-Income Housing Credits Program in 1986. For getting tax credits, investors must comply with several requirements of the IRC §42 Program. First of all, taxpayers should agree to offer low-income housing for at least thirty years. Secondly, taxpayers can get tax credits for every ten years that is called “credit period”. The taxpayers also need to provide low-income housing for fifteen years for keeping the tax credits. The fifteen-year is a “compliance period”. If the taxpayers do not hold the housing for the entire “compliance period”, they will lose some tax credits from previous years. Moreover, after IRS’s jurisdiction, additional fifteen years of providing housing by taxpayers are required by the state agency that has sole jurisdiction. Finally, the qualified low-income housing should be resident, rental real estates, hotels, and hospitals that do not meet the requirement.
The purpose of this program is to increase the construction of buildings as rental housing for low-income families. Qualified investors can acquire tax credits and other tax benefits to relieve the federal income taxes for ten years. Therefore, investors will make more investments in low-income housing and provide those residences to the low-income population.
The requirements of IRC §42 are strict. For example, taxpayers can get tax credits for providing low-income housing to qualified tenants whose income is below a specific limit. Thus, once the tenants’ income gets above a specific amount, taxpayers should try to find another qualified tenant to live in the next available unit. Taxpayers ought to comply with the requirements of IRC §42 all the time because the state agency is responsible for monitoring the taxpayers to make sure they always comply with IRC §42. If any improper behavior is noticed by the state agency, the taxpayer will lose tax credits. Therefore, it is difficult for the taxpayer to earn and keep tax credits.
As for the beneficiaries of IRC§42, there are mainly two kinds of people - investors and tenants. On the one hand, investors can get tax credits for investing in low-income housing and use the tax credits to offset the federal income tax. And on the other hand, increased investments in the low-income housing can help low-income families who live in distressed housing areas. These families can find inexpensive residences.
References
Defending the Mortgage Interest Deduction, National Association of Realtors, 2013. Web. 24 Feb. 2016.
Texas Mortgage Credit Certificate Program, Texas Department of Housing and Community Affairs. Retrieved from https://www.tdhca.state.tx.us/homeownership/fthb/mort_cred_certificate.htm
Publication 530, Internal Revenue Service. Retrieved from https://www.irs.gov/publications/p530/ar02.html#en_US_2015_publink100011857
IRS- Residential Energy Efficient Property Credit (Section 25D) at a Glance. Retrieved from
https://www.irs.gov/Credits-&-Deductions/Individuals/Residential-Energy-Efficient-
Property-CreditCornell University Law School - 26 U.S. Code § 25D - Residential energy efficient property
Retrieved from https://www.law.cornell.edu/uscode/text/26/25Dhttps://www.fas.org/sgp/crs/misc/R42089.pdf
IRC §42, Low-Income Housing Credit, Retrieved from
https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/IRC-42-Low-Income Housing-Credit-Part-I-Introduction-and-Pre-Contact-Analysis
