First-Time Buyers Get a $7,500 Break
????Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit. Following are answers to frequently asked questions about the legislation and how it can help you achieve your dream of home ownership.
Q. Who is eligible to claim the $7,500 tax credit?
A. First-time homebuyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify, 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.
Q. What is the definition of a first-time homebuyer?
A. The law defines a first-time homebuyer as a buyer who hasn’t owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law encompasses homeownership history of both the homebuyer and his or her spouse.?
????For example, if you haven’t owned a home in the past three years but your spouse has, neither you nor your spouse qualify for the first-time homebuyer tax credit.
Q. Instead of buying a new home from a homebuilder, I have hired a contractor to build a home on a homesite that I already own. Do I still qualify for the tax credit?
A. Yes. For the purposes of the tax credit, a principal residence that’s constructed by the homeowner is treated as having been “purchased” on the occupancy date. In this situation, the occupancy date must be on or after April 9, 2008 and before July 1, 2009.?
????In contrast, for newly-constructed homes bought from a homebuilder, eligibility for the tax credit is determined by the closing date.
Q. What is “modified adjusted gross income?”
A. Modified adjusted gross income (MAGI) is defined by the IRS. To find it, a taxpayer must first determine adjusted gross income (AGI). AGI is total income for the 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. 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.
Q. If my modified adjusted gross income is above the limit, do I qualify for any tax credit?
A. Possibly. It depends on your income. Partial tax credits of less than $7,500 are available for some taxpayers whose MAGI exceeds the phaseout limits. However, the credit is unavailable for individuals with modified adjusted gross incomes of more than $95,000 and for married couples filing joint returns with an AGI of more than $170,000.
Q. Can you give me an example of how the partial tax credit is determined?
A. 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, so the couple is $10,000 over this amount.?
????Dividing $10,000 by $20,000, which is the amount specified in the legislation, yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial tax credit available to this couple, multiply $7,500 by 0.5. The result is $3,750.?
????Or, assume that an individual has a modified adjusted gross income of $88,000. That 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. To determine the amount of the partial tax credit available to this individual, multiply $7,500 by 0.35. The result is $2,625.??
????Remember, 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.
Q. Does the tax credit amount differ based on tax filing status?
A. It makes no practical difference whether the homebuyer files as a single or married taxpayer. However, if a household files as “married filing separately” (in effect, filing two returns), then $7,500 is claimed as a $3,750 credit on each of the two returns.
Q. 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?
A. In general, the tax credit is equal to 10 percent of the qualified home purchase price with the amount capped at $7,500. For most first-time homebuyers, this means the tax credit will equal $7,500. For homebuyers purchasing a home priced less than $75,000, the tax credit will equal 10 percent of the purchase price.
Q. I heard that the tax credit is refundable. What does that mean?
A. The fact that the tax credit is refundable means that it 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 of—or even all of—the amount of the tax credit.
????For example, if a qualified homebuyer expected federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit he or she would owe the IRS $1,000 on April 15. Now suppose that the same taxpayer qualified for the $7,500 tax credit. He or she would then receive a check from the IRS for $6,500 ($7,500 minus the $1,000 owed).
Q. What is the difference between a tax credit and a tax deduction?
A. 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, on the other hand, 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, then the tax liability would be reduced by $1,125 (15 percent of $7,500), thereby lowering his or her taxable income from $7,500 to $6,375.
Q. I’m not a U.S. citizen. Can I claim the tax credit?
A. Maybe. Anyone who’s 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.
Q. Does the credit have to be paid back to the government? If so, what are the payback provisions?
A. Yes, the tax credit must be repaid. Homebuyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the home, assuming there is sufficient capital gain from the sale.?
????For example, a homebuyer claiming a $7,500 credit would repay it at $500 per year beginning 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 homeowner sells the home, then the remaining amount would be due from the profit realized. If there’s insufficient profit, however, then the balance would be forgiven.
Q. 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?
A. Yes. Because the tax credit must be repaid, it operates like a zero-interest loan. Assuming an interest rate of 7 percent, that means the homeowner 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 percent interest rate, the tax credit saves homebuyers 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.
Q. 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?
A. Yes. The law allows taxpayers to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008.
Information courtesy of the National Association of Home Builders (NAHB). For more questions and answers about the Housing and Economic Recovery Act of 2008, log on to the association’s Web site at www.federalhousingtaxcredit.com.