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The Worker, Homeownership, and Business Assistance Act of 2009
has established a tax credit of up to $6,500 for qualified
move-up/repeat home buyers (existing home owners) purchasing a
principal residence after November 6, 2009 and on or before April
30, 2010 (or purchased by June 30, 2010 with a binding sales
contract signed by April 30, 2010).
The
following questions and answers provide basic
information about the tax credit. If you have more specific
questions, we strongly encourage you to consult a qualified tax
advisor or legal professional about your unique situation.
1.
Who is eligible to claim the $6,500 tax credit?
Qualified move-up or repeat home buyers purchasing any kind of home
are eligible to claim this credit.
2.
What is the definition of a move-up or repeat home buyer?
The law defines a tax credit qualified move-up home buyer
(“long-time resident”) as a person who has owned and resided in the
same home for at least five consecutive years of the eight years
prior to the purchase date. For married taxpayers, the law tests the
homeownership history of both the home buyer and his/her spouse.
Repeat home buyers do not have to purchase a home that is more
expensive than their previous home to qualify for the tax credit.
3.
How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price
up to a maximum of $6,500. Purchases of homes priced above $800,000
are not eligible for the tax credit.
4.
Are there any income limits for claiming the tax credit?
Yes. The income limit for single taxpayers is $125,000; the limit is
$225,000 for married taxpayers filing a joint return. The tax credit
amount is reduced for buyers with a modified adjusted gross income
(MAGI) above those limits. The phase out 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.
5.
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 the 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 of foreign-earned income.
See IRS Form 5405 for more details.
6.
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
$6,500 are available for some taxpayers whose MAGI exceeds the phase
out limits.
7.
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 $6,500 by 0.5. The result
is $3,250.
Here’s another example: assume that an individual home buyer has a
modified adjusted gross income of $138,000. The buyer’s income
exceeds $125,000 by $13,000. Dividing $13,000 by the phase out range
of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result
is 0.35. Multiplying $6,500 by 0.35 shows that the buyer is eligible
for a partial tax credit of $2,275.
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.
8.
How is this home buyer tax credit different from the tax credit
that Congress enacted in July of 2008? How is this different than
the rules established in early 2009?
The previous tax credits applied only to first-time home buyers and
were for different amounts of money.
9.
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 repeat 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.
10.
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, provided the home is purchased for a price less than or
equal to $800,000. This includes single-family detached homes,
attached homes like townhouses and condominiums, manufactured homes
(also known as mobile homes) and houseboats. The definition of
principal residence is identical to the one used to determine
whether you may qualify for the $250,000 / $500,000 capital gain tax
exclusion for principal residences.
It is important to note that you cannot purchase a home from, among
other family members, your ancestors (parents, grandparents, etc.),
your lineal descendants (children, grandchildren, etc.) or your
spouse or your spouse’s family members. Please consult with your tax
advisor for more information.
Also see IRS Form 5405.
11.
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.
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
the taxpayer qualified for the $6,500 home buyer tax credit. As a
result, the taxpayer would receive a check for $5,500 ($6,500 minus
the $1,000 owed).
12.
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. 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 after November 6, 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).
In contrast, for newly-constructed homes bought from a home builder,
eligibility for the tax credit is determined by the settlement date.
Be sure to check with a tax advisor in cases where a HUD-1 form is
not used at settlement to be sure you have sufficient documentation
to attach to
IRS Form 5405.
13.
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.
14.
I am not a U.S. citizen. Can I claim the tax credit?
Perhaps. Anyone who is not a nonresident alien (as defined by the
IRS) and who has owned and resided in a principal residence in the
United States for at least five consecutive years of the eight years
prior to the purchase date can claim the tax credit if they meet the
income limits. For married taxpayers, the law tests the
homeownership history of both the home buyer and his/her spouse. The
IRS provides a definition of “nonresident alien” in IRS Publication
519.
15.
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 $6,500 in income
taxes and who receives an $6,500 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 $6,500 in income taxes. If the taxpayer
receives a $6,500 deduction, the taxpayer’s tax liability would be
reduced by $975 (15 percent of $6,500), or lowered from $6,500 to
$5,525.
16.
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.
Buyers should adjust the 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.
In addition, rule changes made as part of the economic stimulus
legislation allow home buyers to claim the tax credit and
participate in a program financed by tax-exempt bonds. As a result,
some state housing finance agencies have introduced programs that
provide short-term second mortgage loans that may be used to fund a
down payment. Prospective home buyers should check with their state
housing finance agency to see if such a program is available in
their community. To date, 18 state agencies have announced tax
credit assistance programs, and more are expected to follow suit.
The National Council of State Housing Agencies (NCSHA) has compiled
a list of such programs, which can be found
here.
17.
HUD allows “monetization” of the tax credit. What does that mean?
It means that HUD will allow 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 down payment and closing cost expenses.
Under the guidelines announced by HUD, non-profits and FHA-approved
lenders are allowed to give home buyers short-term loans. 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 down payment requirement.
In addition, approved FHA lenders can purchase a home buyer’s
anticipated tax credit to pay closing costs and down payment costs
above the 3.5 percent down payment that is required for FHA-insured
homes.
18.
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 phase out 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.
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