|
Frequently Asked Questions About the Home Buyer Tax Credit
The American Recovery and Reinvestment Act of 2009 originally authorized a tax
credit of up to $8,000 for qualified first-time home buyers purchasing
a principal residence on or after January 1, 2009 and before December
1, 2009.
However, the tax credit has been extended: If you haven’t owned a home in the last 3 years, you are still eligible for
the $8,000 tax credit. Approved by the President, the Credit will extend through
April 30th to contract on a home. You will have through June
30th to close on it.
Also, the new tax credits have been expanded:
The credit has been expanded to non-first time homebuyers as well, giving some
move-up buyers $6500 of more purchasing power. The caveat is that you
must have owned your current home as your primary residence 5 out of the past 8
years.
The following questions and answers provide basic information about the
tax credit. If you have more specific questions, we strongly encourage
you to consult a qualified tax advisor or legal professional about your
unique situation.
1. Who is eligible to claim the tax credit?
First-time home buyers purchasing any
kind of home—new or resale—are eligible for the tax credit.
To qualify for the tax credit, a home purchase must occur on or after
January 1, 2009 and before December 1, 2009. For the purposes of the
tax credit, the purchase date is the date when closing occurs and the
title to the property transfers to the home owner.
2. What is the definition of a first-time home buyer?
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. However, unmarried joint purchasers may allocate
the credit amount to any buyer who qualifies as a first-time buyer,
such as may occur if a parent jointly purchases a home with a son or
daughter. 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. 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.
4. Are there any income limits for claiming the tax credit?
Yes. The income limit for single
taxpayers is $75,000; the limit is $150,000 for married taxpayers
filing a joint return. The tax credit amount is reduced for buyers with
a modified adjusted gross income (MAGI) of more than $75,000 for single
taxpayers and $150,000 for married taxpayers filing a joint return. The
phaseout range for the tax credit program is equal to $20,000. That is,
the tax credit amount is reduced to zero for taxpayers with MAGI of
more than $95,000 (single) or $170,000 (married) and is reduced
proportionally for taxpayers with MAGIs between these amounts.
5. 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. On 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). Note that AGI includes all
forms of income including 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 higher-education costs.
6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income.
Partial credits of less than $8,000 are available for some taxpayers
whose MAGI exceeds the phaseout limits.
7. Can you give me 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 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.
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 the phaseout range of $20,000 yields 0.65. When you subtract
0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows
that the buyer is eligible for a partial tax credit of $2,800.
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.
8. How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?
The most significant difference is that
this tax credit does not have to be repaid. Because it had to be
repaid, the previous "credit" was essentially an interest-free loan.
This tax incentive is a true tax credit. 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?
Participating in the tax credit program
is easy. You claim the tax credit on your federal income tax return.
Specifically, home buyers 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. However, you will want to be sure
that you qualify for the credit under the income limits and first-time
home buyer tests. Note that you cannot claim the credit on Form 5405
for an intended purchase for some future date; it must be a completed
purchase.
10. What types of homes will qualify for the tax credit?
Any home that will be used as a
principal residence will qualify for the credit. This includes
single-family detached homes, attached homes like townhouses and
condominiums, manufactured homes (also known as mobile homes) and
houseboats. 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.
11. 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. 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 on April 15th.
Suppose now that the taxpayer qualified for the $8,000 home buyer tax
credit. As a result, the taxpayer would receive a check for $7,000
($8,000 minus the $1,000 owed).
12. 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?
Home buyers 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.
13. Instead of buying a new home from a home builder, 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.
14. 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.
15. I live in the District of Columbia. Can I claim both the
Washington, D.C. first-time home buyer credit and this new credit?
No. You can claim only one.
16. I am not a U.S. citizen. Can I claim the tax credit?
Maybe. 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.
17. 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.
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 $8,000 in income
taxes. If the taxpayer receives an $8,000 deduction, the
taxpayer’s tax liability would be reduced by $1,200 (15 percent
of $8,000), or lowered from $8,000 to $6,800.
18. I bought a home in 2008. Do I qualify for this credit?
No, but if you purchased your first home
between April 9, 2008 and January 1, 2009, you may qualify for a
different tax credit.
19. 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?
Yes. 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.
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.
Further, rule changes made as part of
the economic stimulus legislation allow home buyers to claim the tax
credit and participate in a program financed by tax-exempt bonds. Some
state housing finance agencies, such as the Missouri Housing
Development Commission, have introduced programs that provide
short-term credit acceleration loans that may be used to fund a
downpayment. Prospective home buyers should inquire with their state
housing finance agency to determine the availability of such a program
in their community.
20. 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.
Taxpayers buying a home who wish to
claim it on their 2008 tax return, but who have already submitted their
2008 return to the IRS, may file an amended 2008 return claiming the
tax credit. You should consult with a tax professional to determine how
to arrange this.
21. 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 would be available using the 2008 MAGI amounts, then you can
choose the year that yields the largest credit amount.
|