Who is eligible to claim the $8,000 tax credit?

The tax credit is for First time home buyers who purchase a primary residence by executing a binding sales contract between between January 1, 2009 to April 30, 2010. Purchasers can close on property up until June 30, 2010 providing they are under contract by April 30, 2010. This can include purchasing New Construction, Resale, Foreclosure or Short Sale properties. Purchasers must be aged 18+ and not claimed as a dependent by any other tax payer. Please contact the IRS for more information regarding whether contract for deed purchases and/or installment purchases qualify.

 

What is the definition of a first-time home buyer?

Someone who has not owned a principal residence for the past three years. If you owned property before but not during the past 3 year period you will be considered a first time home buyer. Married taxpayers will not be eligible if one spouse has owned property in the past 3 years but the other has not. This includes newly married couples. IRS Notice 2009-12 allows unmarried joint purchasers to 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.

 

How is the amount of the tax credit determined? The tax credit can be determined by crediting up to 10 percent of the home’s purchase price with a maximum of $8,000.

 

Are there any income limits for claiming the tax credit?

After November 6, 2009 single taxpayers income limit is $125,000 and $225,000 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 $125,000 for single taxpayers and $225,000 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 $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.

 

The income limits for claiming the tax credit were raised when the tax credit was extended. Are the higher limits retroactive?

No. The new income limits are only applicable to purchases occurring after November 6, 2009.

 

The income limits for sales occuring on or after January 1, 2009 and on or before November 6, 2009 are $75,000 for single taxpayers and $150,000 for married couples filing jointly.

 

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.

 

If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?

It will completely depend on your income as some taxpayers may qualify for partial credits of less than $8000 whose MAGI exceeds the phase out limits

 

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 $235,000. The applicable phase out to qualify for the tax credit is $225,000, 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. You should always consult your tax advisor for information relating to your specific circumstances.

 

How is this home buyer tax credit different from the tax credit that Congress enacted in early 2009?

The tax credit’s income limits were increased, the documentation requirements were tightened, and the program's deadlines were extended.

 

How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?

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 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). No other applications 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. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase.

 

What types of homes will qualify for the tax credit?

As long as the principal residence is purchased for a price of $800,000 or less then any property will qualify: single family, townhome / condominium, mobile homes, house boats and this includes normal purchases, short sales, foreclosures and pre-foreclosure purchases.

 

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.

 

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 as long as the date of first occupancy is between January 1, 2009 and on or before April 30, 2010 (or by June 30, 2010, provided a binding sales contract was in force by April, 30, 2010) you will still qualify for the tax credit.

 

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 an 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.

 

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.

 

Is a tax credit the same as a tax deduction?

No it is much better. 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.

 

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.

 

Is there a way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 or 2010 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.

 

HUD is now allowing "monetization" of the tax credit. What does that mean?

It means that HUD allows buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 or 2010 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.

 

Under HUD’s guidelines, non-profits and FHA-approved lenders are allowed to give home buyers short-term loans of up to $8,000. The guidelines also allow government agencies, such as state housing finance agencies, to facilitate home sales by providing longer term loans secured by second mortgages.

 

Housing finance agencies and other government entities may also issue tax credit loans, which home buyers may use to satisfy the FHA 3.5 percent downpayment requirement. In addition, approved FHA lenders can purchase a home buyer’s anticipated tax credit to pay closing costs and downpayment costs above the 3.5 percent downpayment that is required for FHA-insured homes.

 

If I’m qualified for the tax credit and buy a home in 2009 (or 2010), can I apply the tax credit against my 2008 (or 2009) tax return?

Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 (or 2010) as if the purchase occurred on December 31, 2008 (or if in 2010, December 31, 2009). This means that the previous year’s income limit (MAGI) applies and the election accelerates when the credit can be claimed. A benefit of this election is that a home buyer in 2009 or 2010 will know their prior year 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 prior year tax return, but who have already submitted their tax return to the IRS, may file an amended return claiming the tax credit using Form 1040X. You should consult with a tax professional to determine how to arrange this.

 

For a home purchase in 2009 or 2010, can I choose whether to treat the purchase as occurring in the prior or present year, depending on in which year my credit amount is the largest?

Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in the present year and a larger credit would be available using the prior year MAGI amounts, then you can choose the year that yields the largest credit amount.

 

Take advantage of this once in a lifetime opportunity now! Home prices have decreased significantly alongside record low interest rates and now an amazing Federal Tax Credit! Call a professional Real Estate professional now to assist you with the process. The Jennifer Walker Derby Team is available to assist you now. JWD@JenniferWalkerDerby.com