2009 Home Buyer Tax Credit Overview
In an effort to stimulate the economy and revive the housing market, Congress has enacted legislation providing a tax credit for first-time home buyers. The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 200
1. The tax credit is for first-time homebuyers only.
o 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 homebuyer and his/her spouse.
2. The tax credit does not have to be repaid.
o This is a true tax credit however buyers must use the residence as their principal residence for at least 3 years or face recapture of the tax credit amount. Certain exceptions apply see IRS form 5405 for details.
3. The tax credit is equal to 10 percent of the home's purchase price up to a maximum of $8,000.
4. The $8,000 Homebuyer tax credit can be combined with the MRB homebuyer program.
5. Prospective homebuyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding.
o Reducing tax withholding (up to the amount of the eligible 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. Specific rules and guidelines do apply.
2009 Home Buyer Tax Credit Q & A
Are there any income limits for claiming the tax credit?
The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
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. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.
How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?
The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous "credit" was essentially an interest-free loan. This tax incentive is a true tax credit.
How does a home buyer claim the tax credit? Do they need to complete a form or application?
Participating in the tax credit program is easy. The buyer claims the tax credit on their 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 69 of their 1040 income tax return. No other applications or forms are required, and no pre-approval is necessary. However, they will want to be sure that 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 that will be used as a principal residence will qualify for the credit. This includes new and resale homes.
It states 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 all the amount of the refundable tax credit.
If a buyer purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on their 2008 tax returns, how can they claim the new $8,000 tax credit instead?
Home buyers in this situation may file an amended 2008 tax return with a 1040X form. Buyers should consult with a tax advisor to ensure they file this return properly.
A buyer is not a U.S. citizen. Can they 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. 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. A tax deduction is subtracted from the amount of income that is taxed
If a buyer is qualified for the tax credit and buys a home in 2009, can they apply the tax credit against their 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.
Please feel free to call me if you have any questions,
James Walker
Real Estate Professional
Keller Williams Realty SWMC
Cell # 512-618-8814
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