The Fabulous Home Project

Recession Relief For Americans: Federal Housing Tax Credit

Hopeful home owners can cash in on, newly enacted legislation providing a tax credit upto $7,500 for first-time home buyers might just be the opportunity of a lifetime.

The Housing and Economic Recovery Act of 2008 authorizes a $7,500 tax credit for qualified first-time home buyers who purchase homes after April 8, 2008 and before July 1, 2009. Here are some questions and answers about the tax credit. You should consult a qualified tax advisor or legal professional about your individual situation and how this tax credit may impact your ability to get a home. It's important to keep in mind that the tax credit is no substitution for being able to afford to pay for a mortgage and maintain a house.

1. Who is eligible to claim the $7,500 tax credit?
2. What is a "first-time home buyer"?
3. How can you claim the tax credit?
4. What types of homes will qualify for the tax credit?
5. Instead of buying a new home from a home builder, can I hire a contractor to construct a home on a lot that I already own?
6. What is "modified adjusted gross income"?
7. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
8. What's an example of how the partial tax credit is determined?
9. Does the credit amount differ based on tax filing status?
10. Are there any circumstances for which buyers whose incomes are at or below the $75,000 limit for singles or the $150,000 limit for married taxpayers might not be able to claim the full $7,500 tax credit?
11. Is the tax credit refundable?
12. What is the difference between a tax credit and a tax deduction?
13. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
14. Does the credit have to be paid back to the government?
15. Why do I have to pay back the money? I want to keep the cash!
16. If the money must be repaid, isn’t the first-time home buyer program really a zero-interest loan rather than a traditional tax credit?
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?
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?
19. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2008 tax return?

1. Who is eligible to claim the $7,500 tax credit?
   First time home buyers purchasing any kind of home are eligible for the tax credit, whether it's a new home or a resale. To qualify for the tax credit, a home purchase must occur after April 8th, 2008 and before July 1st, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs.
   
   
2. What is a "first-time home buyer"?
   In the US, the law defines "first-time home buyer" as a buyer 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. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. If you have a vacation home or rental property, but it isn't your principal residence then you still may disqualify a buyer as a first-time home buyer.
   
   
3. How can you claim the tax credit?
   Easy: claim the tax credit on your federal income tax return when file your annual report after the purchase. No other applications or forms are required. Pre-approval is not necessary. Prospective home buyers will want to make sure they qualify for the credit under the income limits and first-time home buyer tests.
   
   
4. What types of homes will qualify for the tax credit?
   Any home purchased by an eligible first-time home buyer will qualify for the credit. The home must be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes, attached homes like townhouses and condos, mobile homes and houseboats.
   
   
5. Instead of buying a new home from a home builder, can I hire a contractor to construct a home on a lot that I already own?
   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 April 9, 2008 and before July 1, 2009.
   
   In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.
   
   
6. What is "modified adjusted gross income"?
   Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. Look for this on the forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). The AGI includes all forms of income: wages, salaries, interest income, dividends and capital gains.
   
   To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for applicable education costs.
   
   
7. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
   You may still qualify: it will depend on your income. Partial tax credits are available for some taxpayers whose MAGI exceeds the limits. The credit is not available for individual taxpayers with a modified adjusted gross income of more than $95,000 and for married taxpayers filing joint returns with an AGI of more than $170,000.
   
   
8. What's an example of how the partial tax credit is 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 $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 $7,500 by 0.5. The result is $3,750.
   
   Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $7,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,625.
   
   Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
   
   
9. Does the credit amount differ based on tax filing status?
   No. The credit is in general equal to $7,500 for a qualified home purchase, whether the home buyer files taxes as a single or married taxpayer. However, if a household files their taxes as "married filing separately" (in effect, filing two returns), then the credit of $7,500 is claimed as a $3,750 credit on each of the two returns.
   
   
10. Are there any circumstances for which buyers whose incomes are at or below the $75,000 limit for singles or the $150,000 limit for married taxpayers might not be able to claim the full $7,500 tax credit?
    In general, the tax credit is equal to 10% of the qualified home purchase price, but the credit amount is capped or limited to $7,500. For most first-time home buyers, this means the credit will equal $7,500. For home buyers purchasing a home priced less than $75,000, the credit will equal 10% of the purchase price.
    
    
11. Is the tax credit refundable?
    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. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
    
    For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 after he or she files their income tax return. If the taxpayer qualified for the $7,500 home buyer tax credit, the taxpayer would receive a check for $6,500 ($7,500 minus the $1,000 owed).
    
    
12. What is the difference between a tax credit and a tax deduction?
    A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $7,500 in income taxes and who receives a $7,500 tax credit would owe nothing to the IRS.
    
    A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $7,500 in income taxes. If the taxpayer receives a $7,500 deduction, the taxpayer’s tax liability would be reduced by $1,125 (15 percent of $7,500), or lowered from $7,500 to $6,375.
    
    
13. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
    No. The tax credit cannot be combined with the MRB home buyer program.
    
    
14. Does the credit have to be paid back to the government?
    Yes, the tax credit must be repaid. This will not be something you can keep. Home buyers must repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.
    
    
15. Why do I have to pay back the money? I want to keep the cash!
    Congress’s intent was to provide as large a financial resource as possible for home buyers in the year that they purchase a home. In addition to helping first-time home buyers, this will maximize the positive impact on the housing market. The goal is to kick-start the economy use the same mechanism that seized it up. The goal of the program is to increase home sales. The repayment requirement reduces the effect on the Federal Treasury and assumes that home buyers will benefit from stabilized and, eventually, increasing future housing prices.
    
    
16. If the money must be repaid, isn’t the first-time home buyer program really a zero-interest loan rather than a traditional tax credit?
    Yes. Because the tax credit must be repaid, it operates like a zero-interest loan-- one the bank cannot call you on when they fall on hard times. Assuming an interest rate of 7%, that means the home owner can save the equivalent of up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers over $8,100 in interest payments. The program is called a tax credit because it operates through the tax code and is administered by the IRS.
    
    
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 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?
    Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit may be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount for you and your family.
    
    
19. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2008 tax return?
    Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding from their payroll deductions. Reducing tax withholding (up to the amount of the credit) will enable the future home buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the down payment. Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.

Labels: Federal relief, TARP

posted by Shawn DeWolfe @ 8:31 PM