Who is eligible to claim the $7,500 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 April 9, 2008 and before July 1, 2009. For the purposes of the tax
credit, the purchase date is the date when closing occurs.
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. 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 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. No other applications or forms are required. No
pre-approval is necessary; however, prospective home buyers will want to be sure
they qualify for the credit under the income limits and first-time home buyer
tests.
What types of homes will qualify for the tax credit?
Any home purchased by an eligible first-time home buyer will qualify for the
credit, provided that the home will be used as a principal residence and the
buyer has not owned a home in the previous three years. This includes
single-family detached homes, attached homes like townhouses and condominiums,
manufactured homes (also known as mobile homes) and houseboats.
Instead of buying a new home from a home builder, I have 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 April 9, 2008 and before July 1,
2009. In contrast, for newly-constructed homes bought from a home builder,
eligibility for the tax credit is determined by the settlement date.
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 such as foreign income, foreign-housing deductions, student-loan
deductions, IRA-contribution deductions and deductions for higher-education
costs.
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 $7,500 are
available for some taxpayers whose MAGI exceeds the phaseout limits. The credit
becomes totally unavailable for individual taxpayers with a modified adjusted
gross income of more than $95,000 and for married taxpayers filing joint returns
with an AGI of more than $170,000.
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 phaseout to qualify for the tax credit
is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by
$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 $7,500 by 0.5. The result is $3,750.
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 $20,000 yields 0.65. When you subtract 0.65 from 1.0, the
result is 0.35. Multiplying $7,500 by 0.35 shows that the buyer is eligible for
a partial tax credit of $2,625.
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.
Does the credit amount differ based on tax filing status?
No. The credit is in general equal to $7,500 for a qualified home purchase,
whether the home buyer files taxes as a single or married taxpayer. However, if
a household files their taxes as "married filing separately" (in effect, filing
two returns), then the credit of $7,500 is claimed as a $3,750 credit on each of
the two returns.
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?
In general, the tax credit is equal to 10% of the qualified home purchase
price, but the credit amount is capped or limited at $7,500. For most first-time
home buyers, this means the credit will equal $7,500. For home buyers purchasing
a home priced less than $75,000, the credit will equal 10% of the purchase
price.
I heard 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 taxpayer qualified for the $7,500 home buyer tax
credit. As a result, the taxpayer would receive a check for $6,500 ($7,500 minus
the $1,000 owed).
What is the difference between a tax credit and a tax deduction?
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 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, the
taxpayer’s tax liability would be reduced by $1,125 (15 percent of $7,500), or
lowered from $7,500 to $6,375.
Can I claim the tax credit if I finance the purchase of my home
under a mortgage revenue bond (MRB) program?
No. The tax credit cannot be combined with the MRB home buyer 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.
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 phaseout 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.
Does the credit have to be paid back to the government? If so,
what are the payback provisions?
Yes, the tax credit must be repaid. Home buyers will be required to repay the
credit to the government, without interest, over 15 years or when they sell the
house, if there is sufficient capital gain from the sale. For example, a home
buyer claiming a $7,500 credit would repay the credit at $500 per year. The home
owner does not have to begin making repayments on the credit until 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
home owner sold the home, then the remaining credit amount would be due from the
profit on the home sale. If there was insufficient profit, then the remaining
credit payback would be forgiven.
Why must the money be repaid?
Congress’s intent was to provide as large a financial resource as possible
for home buyers in the year that they purchase a home. In addition to helping
first-time home buyers, this will maximize the stimulus for the housing market
and the economy, will help stabilize home prices, and will increase home sales.
The repayment requirement reduces the effect on the Federal Treasury and assumes
that home buyers will benefit from stabilized and, eventually, increasing future
housing prices.
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?
Yes. Because the tax credit must be repaid, it operates like a zero-interest
loan. Assuming an interest rate of 7%, that means the home owner 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% interest rate, the home
buyer tax credit saves home buyers 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.
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.
Is there any way for a home buyer to access the money allocable
to the credit sooner than waiting to file their 2008 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 future home buyer to accumulate
cash by raising his/her take home pay. This money can then be applied to the
downpayment. 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.
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