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Up to $8,000 Tax Credit for Homebuyers

EDITOR’S NOTE: Congress Extends $8,000 Tax Credit – For more information, view our updated Blog HERE.

Congress Enacts Home Buyer Tax Credit

First-time home buyers purchasing a principal residence on or after January 1, 2009, and before December 1, 2009, are eligible for a tax credit of up to $8,000. Unlike the tax credit enacted in 2008, the tax credit does not have to be paid back, providing the homebuyer keeps the property for at least 36 months and resides in the home.

The tax credit is not a downpayment, but it could be used toward a downpayment for those first-time homebuyers who plan ahead.

Frequently Asked Questions on the $8,000 Tax Credit*:

1. Who is eligible to claim the tax credit?
First-time home buyers purchasing a new home or resale are eligible for the tax credit. To qualify, the home purchase must occur on or after January 1, 2009 and before December 1, 2009.

2. What defines a first-time home buyer?
In this context, a “first-time home buyer” is one who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.

3. What types of homes will qualify for the tax credit?
Any home used as a principal residence will qualify for the credit. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.

4.  How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

5. Are there any income limits for claiming the tax credit?

Yes. There is an income limit to qualify. A married couples’ modified adjusted gross income (MAGI) should be under $150,000 and single filers’ MAGI should be less than $75,000.

6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.

7. How is the partial tax credit determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.

8. How is this home buyer tax credit different from the tax credit enacted in 2008?
This tax credit does not have to be repaid. Because it had to be repaid, the previous “credit” was essentially an interest-free loan. However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply.

9. How do I claim the tax credit? Do I need to complete a form or application?
You claim the tax credit on your federal income tax return. Homebuyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on Line 69 of their 1040 income tax return. No other applications or forms are required, and no pre-approval is necessary.

10. I read that the tax credit is “refundable.” What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset.

11. I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns. How can I claim the new $8,000 tax credit instead?

Homebuyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.

12. I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 1, 2009.

In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.

13. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?

Yes. The tax credit can be combined with the MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.

14. I am not a U.S. citizen. Can I claim the tax credit?
Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years, and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of “nonresident alien” in IRS Publication 519.

15. Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.

16. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.

17. If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.

18. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.
 

 

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