$8,000 Break for First-Time Buyers

WHEN THE ECONOMY COMES BACK, HOUSING NEEDS TO LEAD THE WAY. THAT’S WHY THE AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009—BETTER KNOWN AS THE STIMULUS PACKAGE—CONTAINS SEVERAL PROVISIONS AIMED AT BOOSTING THE HOUSING MARKET BY OFFERING MORE INCENTIVES TO BUY.

Chief among these provisions is an $8,000 tax credit for first-time buyers. Last year’s Housing and Economic Recovery Act included a $7,500 tax credit, but that amount had to be repaid over 15 years or when the home sold.

However, the $8,000 tax credit in the stimulus package does not have to be repaid. Policymakers hope that this—combined with record low interest rates and bargain prices—will convince potential buyers that now is the time to get off the fence.

Following are some frequently asked questions about the legislation and how it can help you achieve your dream of home ownership.

Q. Who’s eligible to claim the $8,000 tax credit?
A. First-time homebuyers purchasing any kind of home—new or resale—are eligible. To qualify, you must close on your home no later than November 30—so time is running out.

Q. What’s 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 tests the 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. But in this case, “home” means principal residence. So you can still qualify even if you’ve previously owned a vacation home or rental property.

Q. How’s the amount of the tax credit determined?
A. The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

Q. Are there any income limits for claiming the tax credit?
A. The tax credit amount is reduced for a single person with a modified adjusted gross income (MAGI) of more than $75,000 and a married couple filing a joint return with a MAGI of more than $150,000.

The tax credit amount is reduced to zero for a single person with a MAGI of more than $95,000
and a married couple filing a joint return with a MAGI of more than $170,000. It’s reduced proportionally for those with MAGIs between these amounts.

Q. How do you calculate your MAGI?
A. MAGI is defined by the IRS. To find it, first determine your adjusted gross income (AGI), which is your 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 the first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4. Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

To determine your 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 MAGI is above the limit, do I qualify for any tax credit?
A. Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.

Q. Can you give me an example of how a partial tax credit is determined?
A. Sure. Assume that a married couple has a MAGI of $160,000. The applicable phaseout is $150,000, so the couple is $10,000 over the limit. Dividing $10,000 by $20,000, which is the formula specified in the legislation, yields 0.5. When you subtract 0.5 from 1.0, the remainder is 0.5. To determine the amount of the partial tax credit available to this couple, multiply $8,000 by 0.5. The result is $4,000.

Or, assume that an individual has a MAGI of $88,000. The applicable phaseout is $75,000, so the individual is $13,000 over the limit. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the remander is 0.35. To determine the amount of the partial tax credit available to this individual, multiply $8,000 by 0.35. The result is $2,800.

Q. How is this tax credit different from the tax credit that Congress enacted in July of 2008?
A. The most significant difference is that this tax credit doesn’t have to be repaid. However, you must use the home as a principal residence for at least three years or face recapture of the tax credit amount.

Q. How do I claim the tax credit? Do I need to complete a form or application?
A. It’s surprisingly easy. You claim the tax credit on your federal income tax return. Specifically, homebuyers should complete IRS Form 5405 to determine their tax credit amount and then claim this amount on Line 69 of their 1040 form.

Q. What types of homes will qualify for the tax credit?
A. Any home that will be used as a principal residence qualifies. This includes single-family detached homes, attached homes such as townhouses and condominiums, manufactured homes and even houseboats.

Q. I read that the tax credit is refundable. What does that mean?
A. The fact that the credit is refundable means that you can claim the credit even if you have little or no federal income tax liability to offset. Typically this involves the government sending you a check for a portion—or even the entire amount—of the refundable tax credit.

For example, if you expected a federal income tax liability of $5,000 and had tax withholding
of $4,000 for the year, then you’d owe the IRS $1,000 on April 15. However, if you qualified for the $8,000 tax credit, you’d get a check for $7,000 ($8,000 minus the $1,000 owed).

Q. I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax return. How can I claim the new $8,000 tax credit instead?
A. You may file an amended tax return using a 1040X form. But you should consult with a tax advisor to ensure you file this return properly.

Q. I hired a contractor to build a home on a homesite that I already own. Do I still qualify for the tax credit?
A. Yes, but a principal residence that’s constructed by the home-owner is treated by the tax code as having been “purchased” on the occupancy date, not the closing date. That date must be on or after January 1, 2009 and before December 1, 2009.

Q. Is there any way I can access the tax credit money before filing my 2009 tax return?
A. Yes. If you believe you qualify for the tax credit, then you’re permitted to reduce your income tax withholding up to the amount of the credit, thereby raising your take-home pay. ?
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?In addition, the State of Florida has just adopted the Florida Homebuyer Opportunity Program, through which the state will lend qualified applicants the $8,000 up front.?

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 you to treat a qualified home purchase in 2009 as if the purchase occurred on December 31, 2008.