First, let's discuss who is eligible for the tax credit: 1) First time homebuyers OR buyers who have not owned a home in the past 3 years. In other words, if you have not owned a home in the 3 year period prior to your closing date, you are qualified to take the tax credit. For example, if you sold a home in May 1, 2005, then rented for awhile, then purchased another home on May 2, 2008, you qualify for the tax credit. AND 2)Your adjusted gross income cannot exceed $95,000 if you are single, or $170,000 if you are married filing jointly.
Now, there are two forms of the tax credit, depending on when you purchase(d) your home. If your closing date was between April 9, 2008 and December 31, 2008, you may take the $7,500 refundable tax credit. If you ordinarily get a refund at the end of the year, you will receive $7,500 MORE than you normally would! BUT, this credit is refundable, meaning you will have to pay it back if you take it. The payment schedule is very simple - starting with your 2010 tax year filing (in 2011), you will pay back $500 per year for 15 years, but you don't have to write a check - it is withheld from your normal tax refund for each of those 15 years. This is an INTEREST-FREE LOAN, people! If you sell your home before you've fully paid back the $7,500, the balance will be taken out of your profit, but if you don't have enough profit to cover the balance, the remainder is forgiven.
The second type of tax credit is the $8,000 NON-REFUNDABLE tax credit. This tax credit applies to purchases closed between January 1, 2009 and December 1, 2009. Unlike the first type of tax credit, this one DOES NOT have to be repaid - THIS IS FREE MONEY, HONEY! It's simple, just buy a home between January 1st and December 1st of this year, and you will be entitled to receive a check for $8,000 from the government! The best part is this: you don't have to wait to file your 2009 taxes to get the money - you can amend your 2008 return (consult a qualified tax professional), claim the 2009 tax credit, and get your money as soon as your amended return is processed by the IRS! SERIOUSLY, FREE MONEY that you can use to fix up your new home, or pay someone back who loaned you the money for your down payment! And they say money doesn't grow on trees...!
The only catch is this: the amount of the tax credit may be less than $8,000 (or $7,500, which ever type of tax credit applies to you). The amount of the tax credit you may take is the lower of $8,000 ($7,500 if applicable), or 10% of the purchase price. In other words, if you bought a home for $50,000 (good luck finding that home!), you could only take a $5,000 ($50,000 X 10%) tax credit. As long as the home you purchase is $80,000 or more, you qualify for the FULL tax credit!
Now, with interest rates and prices so low and FREE MONEY waiting to be claimed by qualified home buyers, what are you waiting for?!?! Pick your share off the money tree - Call a REALTOR today!
1. What’s this new homebuyer tax incentive for 2009?
The 2008 $7500, repayable credit is increased to $8000 and the repayment feature is eliminated for 2009 purchasers. Any home that is purchased for $80,000 or more qualifies for the full $8000 amount. If the house costs less than $80,000, the credit will be 10% of the cost. Thus, if an individual purchased a home for $75,000, the credit would be $7500. It is available for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009.
2. Who is eligible?
Only first-time homebuyers are eligible. A person is considered a first-time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the 2009 purchase.
3. How does a tax credit work?
Every dollar of a tax credit reduces income taxes by a dollar. Credits are claimed on an individual’s income tax return. Thus, a qualified purchaser would figure out all the income items and exemptions and make all the calculations required to figure out his/her total tax due. Then, once the total tax owed has been computed, tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return a person has total tax liability of $9500, an $8000 credit would wipe out all but $1500 of the tax due. ($9,500 - $8000 = $1500)
4. So what happens if the purchaser is eligible for an $8000 credit but their entire income tax liability for the year is only $6000?
This tax credit is what’s called "refundable" credit. Thus, if the eligible purchaser’s total tax liability was $6000, the IRS would send the purchaser a check for $2000. The refundable amount is the difference
between $8000 credit amount and the amount of tax liability. ($8000 - $6000 = $2000) Most taxpayers determine their tax liability by referring to tables that the IRS prepares each year.
5. How does withholding affect my tax credit and my refund?
A few examples are provided at the end of this document. There are several steps in this calculation, but most income tax software programs are equipped to make that determination.
6. Is there an income restriction?
Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals filing Form 1040 as Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Married couples who file a Joint return may have income of no more than $150,000.
7. How is my "income" determined?
For most individuals, income is defined and calculated in the same manner as their Adjusted Gross Income (AGI) on their 1040 income tax return. AGI includes items like wages, salaries, interest and dividends, pension and retirement earnings, rental income and a host of other elements. AGI is the final number that appears on the bottom line of the front page of an IRS Form 1040.
8. What if I worked abroad for part of the year?
Some individuals have earned income and/or receive housing allowances while working outside the US. Their income will be adjusted to reflect those items to measure Modified Adjusted Gross Income (MAGI). Their eligibility for the credit will be based on their MAGI.
9. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?
Not always. The credit phases-out between $75,000 - $95,000 for singles and $150,000 - $170,000 for married filing joint. The closer a buyer comes to the maximum phase-out amount, the smaller the credit will be. The law provides a formula to gradually withdraw the credit. Thus, the credit will disappear after an individual’s income reaches $95,000 (single return) or $170,000 (joint return). For example, if a married couple had income of $165,000, their credit would be reduced by 75% as shown: Couple’s income $165,000 Income limit 150,000 Excess income $15,000 The excess income amount ($15,000 in this example) is used to form a fraction. The numerator of the fraction is the excess income amount ($15,000). The denominator is $20,000 (specified by the statute).
In this example, the
disallowed portion of the credit is 75% of $8000, or $6000 ($15,000/$20,000 = 75% x $8000 = $6000) Stated another way, only 25% of the credit amount would be allowed. In this example, the allowable credit would be $2000 (25% x $8000 = $2000)
10. What’s the definition of "principal residence?"
Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50%). It is also defined as "owner-occupied" housing. The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of new or existing dwelling. Even some houseboats or manufactured homes count as principal residences.
Both of the answers you received from agents here are well written and explain in detail many of the aspects and benefits of the tax credit. Kudos to these agents for being so well informed! For further information, I suggest: Go to my website at http://www.genemundt.com. I have a convenient flyer there that you can download for your viewing, benefit and assistance.
Secondly, get to a professional mortgage lender soon to get assistance and guidance regarding your upcoming purchase. Your lender will be able to pre-qualify you, perhaps the most important step taken in the pre-purchase period. This pre-qualification will assist you in many ways. It will inform you as to your FICO scores, any possible problems that exist on your credit report (always valuable information to have), and give you the value of home you can consider and qualify for. This one procedure will also strengthen any offer you make on a home. Pre-qualification has become almost mandatory as many sellers will not even entertain the offer of a non-pre-qualified buyer.
I would be more than happy to answer any further questions you might have regarding your upcoming purchase and subsequent mortgage needs. Through my company, I am fully capable and licensed to assist you in Virginia and multiple states across the country. Please contact me here at trulia.com, my website, or email at your convenience if I can be of assistance to you.
Gene Mundt, Professional Mortgage Banker http://www.genemundt.com