Louisville Mortgage Leader: $8,000 First-Time Home Buyer Tax Credit- Extended

November 11, 2009

**$8,000 First-Time Home Buyer Tax Credit- Extended

In what has been urged as a must-have by real estate professionals and builders, the $8000 tax credit for first-time home buyers (previously due to expire Nov. 30), has been extended. As you know not only has it been extended, but it has also been expanded to include more buyers. Read below for additional details...

Frequently Asked Questions About the First-Time Home Buyer Tax Credit

The Worker, Homeownership, and Business Assistance Act of 2009 has extended the tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence. The tax credit now applies to sales occurring on or after January 1, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify. For sales occurring after November 6, 2009, the Act establishes income limits of $125,000 for single taxpayers and $225,000 for married couples filing joint returns.The income limits for sales occurring on or after January 1, 2009 and on or before November 6, 2009, are $75,000 for single taxpayers and $150,000 for married taxpayers filing joint returns.

1.Who is eligible to claim the $8,000 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 1st, 2009 and before December 1st, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs.

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. 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?
(New Info!)

Yes. For sales occurring after November 6, 2009, the income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return. The tax credit 1. amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $125,000 for single taxpayers and $225,000 for married taxpayers filing a joint return. The phase-out 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 $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.

5. 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 exceed the phase-out limits.

6. 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 phase-out 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 $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 $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.

**7. How is this tax credit different from the tax credit that Congress enacted in early 2009? (New Info!)

The tax credit’s income limits were increased and the program’s deadlines have been extended.

8. How do I claim the tax credit? Do I need an application?

Participating in the tax 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 you qualify for the credit under the income limits and first-time buyer restrictions.

9. What types of home will qualify for the tax credit?

Any home that will be used as a principle residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes and houseboats. The definition of principle residence is identical to the one used to determine whether you may qualify for the $250,000 /$500,000 capital gain tax exclusion for principle residences.

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 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 $5000 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 tax payer 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).

**11. For a home purchase in 2009 or 2010, can I choose whether to treat the purchase as occurring in the prior or present year, depending on in which year my credit amount is the
largest? (New Info!)

Yes. If the applicable income phase-out would reduce your home buyer tax credit amount in the present year and a larger credit would be available using the prior MAGI amounts, then you can choose the year that yields the largest credit amount.

12. Instead of buying a home through a home builder, I hired a contractor to construct a home on a lot that I already owned. Do I still qualify for the tax credit?

Yes. For the purposes of the home buyer tax credit, a principle 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 on or before April 30th, 2010 (or June 30th, 2010, provided a binding sales contract was in force by April 30th, 2010. In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date and may now qualify for the recently added new construction home tax credit.

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 the 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?

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.

15. Is a tax credit the same as a tax deduction?

No. A tax credit is a dollar for dollar reduction in what the tax payer 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% tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s liability would be reduced by $1,200 (15% of $8,000), or lowered from $8,000 to $6,800.

16. 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.

17. Is there a way for the 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 will 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 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 become liable for repayment to the IRS of income tax and possible interest charges and penalties.

Note: This information has been provided to be used as a general guidance and is not intended to constitute as legal advice, tax advice, accounting services or professional consulting. Before making any decision or taking any action you should consult a professional advisor. Information is subject to change without notice and was originally complied from many sources including federalhousingtaxcredit.com.

Please contact us if you have additional questions concerning the $8000 tax credit extension.

Click here for info on the NEW $6500 Move-Up/Repeat Home Buyer Tax Credit