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The Worker,
Homeownership, and Business Assistance Act of 2009 has extended the
tax credit of up to $8,000 for qualified first-time home buyers
purchasing a principal residence. The tax credit now applies to
sales occurring on or after January 1, 2009 and on or before April
30, 2010. However, in cases where a binding sales contract is signed
by April 30, 2010, a home purchase completed by June 30, 2010 will
qualify.
For sales occurring after November 6, 2009, the Act establishes
income limits of $125,000 for single taxpayers and $225,000 for
married couples filing joint returns.
The income limits for sales occurring on or after January 1, 2009
and on or before November 6, 2009, are $75,000 for single taxpayers
and $150,000 for married taxpayers filing joint returns.
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 $8,000 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 January 1, 2009 and on or before
April 30, 2010. For the purposes of the tax credit, the purchase
date is the date when closing occurs and the title to the property
transfers to the home owner. A limited exception exists for certain
contract for deed purchases and installment sale purchases.
See the IRS website for more detail.
However, the law also allows home sales occurring by June 30, 2010
to qualify, provided they are due to a binding sales contract in
force on or before April 30, 2010.
Persons who are claimed as dependents by other taxpayers or who are
under age 18 are not qualified for the tax credit program.
2.
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.
However, 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.
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 $8,000.
4.
Are there any income limits for claiming the tax credit?
Yes. For sales occurring after November 6, 2009, 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) of more than
$125,000 for single taxpayers and $225,000 for married taxpayers
filing a joint return. 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.
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 occurring 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.
6.
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 of foreign-earned income.
See IRS Form 5405 for more details.
7.
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
$8,000 are available for some taxpayers whose MAGI exceeds the phase
out limits.
8.
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.
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 phaseout range
of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result
is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible
for a partial tax credit of $2,800.
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.
9.
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.
10.
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.
11.
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.
12.
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 $8,000 home buyer tax credit. As a
result, the taxpayer would receive a check for $7,000 ($8,000 minus
the $1,000 owed).
13.
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 on or after 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).
In contrast, for newly-constructed homes bought from a home builder,
eligibility for the tax credit is determined by the settlement date.
14.
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.
15.
I live in the District of Columbia. Can I claim both the
Washington, D.C. first-time home buyer credit and this new credit?
No. You can claim only one.
16.
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.
17.
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. Using the same example, assume the taxpayer is in the 15
percent tax bracket and owes $8,000 in income taxes. If the taxpayer
receives an $8,000 deduction, the taxpayer’s tax liability would be
reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to
$6,800.
18.
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.
19.
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 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.
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.
20.
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 down
payment 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 down payment costs above the 3.5 percent down
payment that is required for FHA-insured homes.
21.
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.
22.
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.
Contact
our office at 409-899-1800 for additional information. |
