Note: At this time the current stimulus plan has only been agreed to by the Senate and the House of Representatives - there has NOT been a final vote yet so details are still subject to change.
The tax credit (not a tax deduction) will be 10% of the purchase price of a home, up to a maximum of $7,500 or $8,000 depending upon when you purchased. In other words, the government is providing first-time home buyers an interest-free loan to be used for home improvements or any other use. The confusing part is we will now have two different, but similar, first time home buyer tax credit plans running.
Is it $15,000, is it $7,500, or...Congress seems to have settled on $8,000 as the amount of the tax rebate for first time home buyers. The other two significant alterations just announced is that the tax credit would be forgiven if the buyer does not sell the home in the first three years, and the opportunity to purchase a home is extended to December 1,2009.
This will mean that first time home owners who purchased between April 9th, 2008 and December 31st, 2008 fall under the rules of the current tax credit plan of $7,500 with repayment required over 15 years.
The NEW plan will apply to those first time home buyers who purchase a home after January 1st, 2009 and before December 1st, 2009. Hey, it's the U.S. Tax Code - did you think this would make sense?
Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.
FAQ's:
- 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.
- 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.
- Does the credit amount differ based on tax filing status? No. The credit is in general equal to $7,500 or $8,000 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 or $8,000 is claimed as a $3,750 or $4,000 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 or $8,000. For most first-time home buyers, this means they will receive the maximum credit. For home buyers purchasing a home priced less than $75,000, the credit will equal 10% of the purchase price.
- 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.
- Does the credit have to be paid back to the government? If so, what are the payback provisions? If you purchased between April 9th, 2008 and December 31st, 2008 - 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. If you purchase a home between January 1st, 2009 and December 1st, 2009 - You might NOT have to pay back the credit, if you own the home for at least three years.
Please remember, these are my interpretations of the plan as I understand them – you must consult with your tax accountant to determine how this plan will impact you and your taxes.
If you, or someone you know is thinking about purchasing their first home, give me a call. Getting pre-approved is easy! 15 minutes on the phone and I'll get you started.
Michael Mullin, WA 510-LO-44740
Branch Manager/Mortgage Consultant
First Priority Financial/Lake Spokane Home Loans
Office: 509-252-9151
