First-time homebuyers who qualify for up to $8,000 in new tax credits under the 2009 economic stimulus plan can claim the credit on their 2008 or 2009 tax returns. They don’t have to wait until 2010 to get their money; they can claim the tax credit when filing their 2008 taxes this year, by April 15.
The federal stimulus package, called the American Recovery and Reinvestment Act of 2009, provides qualified first-time homebuyers with the tax credit up to 10 percent of a home’s purchase price with a maximum of $8,000. Purchases must be between Jan. 1 and Dec. 1.
The tax credit is capped at $4,000 for married people filing separately, and the amounts are less for people whose adjusted gross income is over $75,000, or $150,000 for joint filers.
The tax credit is refundable, which means that the homebuyer 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 the entire amount of the refundable tax credit.
Interestingly, one can choose the tax year, 2009 or 2008, that yields the largest credit amount. If the applicable income phaseout would result in less tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI (a modified adjusted gross income) amounts, then one can choose the more favorable tax year to apply the tax credit.
The following discussion will provide you more detail information whether you are qualified or not and how you claim for the credit.
How to claim the tax credit
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 69 of their 1040 income tax return.
The IRS has posted a revised version of Form 5405, First-Time Homebuyer Credit, on www.IRS.gov. The instructions to the revised Form 5405 provide additional information on who can (or can’t) claim the credit, income limitations and repayment of the credit.
People who already filed federal income tax returns this year can still get the homebuyer tax credit early, by filing an amended return. They would need to file a 1040X to amend their tax returns, reflecting the new tax credit.
The other alternative for those who already filed the tax returns is to wait claiming the tax credit when filing 2009 tax returns, by April 15, 2010.
Some people may have bought a home after Jan. 1, but before the new tax credit was adopted on Feb. 17. If they’ve already filed their taxes, they may have claimed the old credit. They, too, could file an amended 1040X, to get the new credit this year.
Definition of a first-time homebuyer
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.
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 homebuyer tax credit.
Unmarried joint purchasers may 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 homebuyer.
Definition of principal residence
Any home that will be used as a principal residence will qualify for the credit. 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.
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 before December 1, 2009.
The buyer must live in the home for at least three years after the purchase date. Home purchasers cannot move, sell or otherwise leave the home they purchase for at least three years to retain eligibility to receive the tax credit.
Income limits
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.
To find a modified adjusted gross income (MAGI), a taxpayer must first determine "adjusted gross income" or AGI. Adding to AGI certain amounts, such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs, results in the MAGI.
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. Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
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Tuesday, March 24, 2009
Monday, March 16, 2009
Mortgage interest tax deduction
In the current economic malaise, people save every penny they can. Homeowner, specifically, should take advantage from mortgage interest tax deduction. But be careful, because some tax pros say taxpayers' mortgage interest deductions had just been targeted for IRS audit.
There is a good article "Homing in on audits" on MarketWatch discussing how the mortgage interest deduction works. Here is the excerpt from the article for average non-millionaires.
To deduct the interest on loans you received since October 13, 1987, the loan must have been used specifically to buy, build, improve or repair the property. Sounds simple, right?
O.K., suppose you bought the house in 1988 for $200,000 with zero down. By 1995, the house was worth $600,000. So you refinanced it to 70% of the new value. Your new loan is $420,000, or $220,000 higher than your original loan.
You used that $220,000 to pay off your $15,000 car loan (a personal expense), spent $40,000 to add a room (improvement), paid off $35,000 in credit cards (personal expense), $20,000 went into the business (business expenses), $60,000 were gifts to children and grandchildren (personal) and you used the other $50,000 to build up your savings and investments (investment costs).
How much of the new mortgage can you deduct on your Schedule A?
The original $200,000, plus the $40,000 for the new room adds up to $240,000 of acquisition debt and improvement debt. Plus, up to $100,000 of debts used for personal purposes. That means you may deduct interest on up to $340,000 of the total $420,000 mortgage balance.
There is a good article "Homing in on audits" on MarketWatch discussing how the mortgage interest deduction works. Here is the excerpt from the article for average non-millionaires.
To deduct the interest on loans you received since October 13, 1987, the loan must have been used specifically to buy, build, improve or repair the property. Sounds simple, right?
O.K., suppose you bought the house in 1988 for $200,000 with zero down. By 1995, the house was worth $600,000. So you refinanced it to 70% of the new value. Your new loan is $420,000, or $220,000 higher than your original loan.
You used that $220,000 to pay off your $15,000 car loan (a personal expense), spent $40,000 to add a room (improvement), paid off $35,000 in credit cards (personal expense), $20,000 went into the business (business expenses), $60,000 were gifts to children and grandchildren (personal) and you used the other $50,000 to build up your savings and investments (investment costs).
How much of the new mortgage can you deduct on your Schedule A?
The original $200,000, plus the $40,000 for the new room adds up to $240,000 of acquisition debt and improvement debt. Plus, up to $100,000 of debts used for personal purposes. That means you may deduct interest on up to $340,000 of the total $420,000 mortgage balance.
Friday, March 6, 2009
Stimulus Plan for First-Time Home Buyers
In its efforts to stimulate the economy and revive the housing market, Congress has enacted legislation called the American Recovery and Reinvestment Act of 2009. One of provisions that will benefit homebuyers is a tax credit of up to $8,000 for qualified first-time homebuyers purchasing a home as a principal residence for at least three years or face recapture of the tax credit amount.
Time is of the essence for buyers who want to take advantage of this opportunity. Only homes purchased within the period starting from January 1, 2009 to December 1, 2009 are eligible.
This special feature can put money in homebuyers’ pockets right now rather than waiting another year to claim the tax credit. This important change gives qualifying homebuyers cash they do not have to pay back.
This tax credit is different from the previous tax credit already available to some homeowners under Housing and Economic Recovery Act that Congress enacted in July of 2008. The most significant difference is that this tax credit does not have to be repaid. The previous $7,500 tax credit was essentially a 15-year interest-free loan that was available to homebuyers who purchased their homes after April 9, 2008, and before July 1, 2009.
First-Time Home Buyer Tax Credit Summary
The tax credit is refundable, which means that the homebuyer 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 the entire amount of the refundable tax credit.
Interestingly, one can choose the tax year, 2009 or 2008, that yields the largest credit amount. If the applicable income phaseout would result in less tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI (a modified adjusted gross income) amounts, then one can choose the more favorable tax year to apply the tax credit.
Time is of the essence for buyers who want to take advantage of this opportunity. Only homes purchased within the period starting from January 1, 2009 to December 1, 2009 are eligible.
This special feature can put money in homebuyers’ pockets right now rather than waiting another year to claim the tax credit. This important change gives qualifying homebuyers cash they do not have to pay back.
This tax credit is different from the previous tax credit already available to some homeowners under Housing and Economic Recovery Act that Congress enacted in July of 2008. The most significant difference is that this tax credit does not have to be repaid. The previous $7,500 tax credit was essentially a 15-year interest-free loan that was available to homebuyers who purchased their homes after April 9, 2008, and before July 1, 2009.
First-Time Home Buyer Tax Credit Summary
- The tax credit is for first-time homebuyers only
- The house being purchased must be a principal residence
- The credit is available for homes purchased within the period starting from January 1, 2009 to December 1, 2009.
- Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.
- The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
- The tax credit does not have to be repaid.
The tax credit is refundable, which means that the homebuyer 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 the entire amount of the refundable tax credit.
Interestingly, one can choose the tax year, 2009 or 2008, that yields the largest credit amount. If the applicable income phaseout would result in less tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI (a modified adjusted gross income) amounts, then one can choose the more favorable tax year to apply the tax credit.
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