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 Magi’s 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 of foreign-earned income.
See IRS Form 5405 for more details.
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 phase-out 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 phase-out to qualify for the tax credit is $150,000, and the
couple is $10,000 over this amount. Dividing $10,000 by the phase-out 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 phase
out 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. Please consult with your tax advisor for more
information.
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 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.
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 down payment. Prospective home
buyers should inquire with their state housing finance agency to determine
the availability of such a program in their community.
The National Council of State
Housing Agencies (NCSHA) has compiled a list of such programs, which can be
found
here.
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
phase-out 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.