First-Time
Home Buyer Tax Credit
For aspiring first-time home owners who find their goal stubbornly elusive, newly
enacted legislation providing a tax credit of as much as $7,500 for
first time
home buyers might just be the opportunity of a lifetime.
But like so many things in life, time is of the essence for buyers who
want to take advantage of this outstanding opportunity - because only
homes purchased on or after April 9, 2008 and before July 1, 2009 are
eligible.
First-Time Home Buyer Tax Credit at a Glance
- The tax credit is
available for first-time home buyers only.
- The maximum credit
amount is $7,500.
The credit is available for homes purchased on or after April 9,
2008 and before
July 1, 2009.
- Single taxpayers
with incomes up to $75,000 and married couples with incomes up to
$150,000 qualify for the full tax credit.
- The tax credit works
like an interest-free loan and must be repaid over a 15-year period.
The Housing and Economic
Recovery Act of 2008 authorizes a $7,500 tax credit for qualified
first-time home buyers purchasing homes on or after April 9, 2008 and
before July 1, 2009. The questions and answers below will provide basic
information about the tax credit. If you have more specific
questions, I strongly encourage you to consult a qualified tax advisor or
legal professional about your unique situation.
Frequently Asked Questions (F.A.Q)
1. Who is
eligible to claim the $7,500 tax credit?
2. What is
the definition of a first-time home buyer?
3. How do I
claim the tax credit? Do I need to complete a form or application?
4. What
types of homes will qualify for the tax credit?
5. Can you
give me an example of how the partial tax credit is determined?
6. Does the
credit amount differ based on tax filing status?
7. 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?
8. I heard
that the tax credit is refundable. What does that mean?
9. What is
the difference between a tax credit and a tax deduction?
10. Does
the credit have to be paid back to the government? If so, what are the
payback provisions?
11. Why
must the money be repaid?
12. Because
the money must be repaid, isn’t the first-time home buyer program really
a zero-interest loan rather than a traditional tax credit?
13. 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?
14. 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—new or resale—are eligible for the tax credit. To qualify
for the tax credit, a home purchase must occur on or after April 9,
2008 and before July 1, 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 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. No other applications or forms are required. No
pre-approval is necessary; however, prospective home buyers will want
to be 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, provided
that the home will 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
condominiums, manufactured homes (also known as mobile homes) and
houseboats.
5)
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 $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.
6) 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.
7)
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 at $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.
8)
I heard 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
taxpayer qualified for the $7,500 home buyer tax credit. As a result,
the taxpayer would receive a check for $6,500 ($7,500 minus the $1,000
owed).
9)
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.
10)
Does the credit have to be paid
back to the government? If so, what are the payback provisions?
Yes, the tax credit must be repaid.
Home buyers will be required to 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.
11) Why must the money be
repaid?
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 stimulus for the housing market
and the economy, will help stabilize home prices, and will 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.
12)
Because 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. Assuming
an interest rate of 7%, that means the home owner saves 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. Also like a tax
credit, it provides a reduction in tax liability in the year it is
claimed.
13)
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.
14)
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. 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.
