A Window of Opportunity has just opened for first-time home buyers!
President Bush signed a housing stimulus bill with exciting implications for
first-time home buyers who act promptly. The bill provides up to a $7,500 tax
credit for qualified purchasers.
First-Time Home Buyer Tax Credit at a Glance:
The tax credit is
available for first-time home buyers only.
The maximum credit
amount is $7,500.
The credit is
available for homes purchased on or after
July 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.
Association of Home Builders)
contact Bob as soon as possible (Direct phone: 847-971-9902; E-mail: Bob@BobDohn.com) if you or someone you know
would like to take advantage of this limited time opportunity! See the FAQ’s
below for more information.
FAQ’s About the
First-Time Home Buyer Tax Credit (Source: National Association of Home
Who is eligible to
claim the $7,500 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
July 1, 2009
. For the purposes of the tax credit, the purchase
date is the date when closing occurs.
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 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
What types of homes
will qualify for the tax credit?
Any home purchased by an
eligible first-time home buyer will qualify for the credit, provided that the
home will be used as a principal residence and the buyer has not owned a home
in the previous three years. This includes single-family detached homes,
attached homes like townhouses, and condominiums.
Instead of buying a new
home from a home builder, I have 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
April 9, 2008
July 1, 2009
In contrast, for newly-constructed
homes bought from a home builder, eligibility for the tax credit is determined
by the settlement date.
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 such as foreign income,
foreign-housing deductions, student-loan deductions, IRA-contribution
deductions and deductions for higher-education costs.
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 $7,500 are available for some taxpayers
whose MAGI exceeds the phase-out limits. The credit
becomes totally unavailable for individual taxpayers with a modified adjusted
gross income of more than $95,000 and for married taxpayers filing joint
returns with an AGI of more than $170,000.
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 $160,000. The
applicable phase-out to qualify for the tax credit is $150,000, and the couple
is $10,000 over this amount. Dividing $10,000 by $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 $7,500 by 0.5. The result is $3,750.
Here’s another example: assume
that an individual home buyer has a modified adjusted gross income of $88,000.
The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000
yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying
$7,500 by 0.35 shows that the buyer is eligible for a partial tax credit of
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.
Does the credit amount
differ based on tax filing status?
No. The credit is in general
equal to $7,500 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 is claimed as a $3,750 credit on each of the two
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. For most first-time home buyers, this means the credit will
equal $7,500. For home buyers purchasing a home priced less than $75,000, the
credit will equal 10% of the purchase price.
I heard 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
taxpayer qualified for the $7,500 home buyer tax credit. As a result, the
taxpayer would receive a check for $6,500 ($7,500 minus the $1,000 owed).
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.
Can I claim the tax
credit if I finance the purchase of my home under a mortgage revenue bond (MRB)
No. The tax credit cannot be
combined with the MRB home buyer program.
I live in the
District of Columbia
. Can I claim both the DC first-time home buyer credit and
this new credit?
No. You can claim only one.
I am not a
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.
Does the credit have to
be paid back to the government? If so, what are the payback provisions?
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.
Why must the money be
Congress’s intent was to provide
as large a financial resource as possible for home buyers in the year that they
purchase a home. In addition to helping first-time home buyers, this will
maximize the stimulus for the housing market and the economy, will help
stabilize home prices, and will increase home sales. The repayment requirement
reduces the effect on the Federal Treasury and assumes that home buyers will
benefit from stabilized and, eventually, increasing future housing prices.
Because the money must
be repaid, isn’t the first-time home buyer program really a zero-interest loan rather than a traditional tax credit?
Yes. Because the tax credit must
be repaid, it operates like a zero-interest loan. Assuming an interest rate of
7%, that means the home owner saves up to $4,200 in interest payments over the
15-year repayment period. Compared to $7,500 financed through a 30-year
mortgage with a 7% interest rate, the home buyer tax credit saves home buyers
over $8,100 in interest payments. The program is called a tax credit because it
operates through the tax code and is administered by the IRS. Also like a tax
credit, it provides a reduction in tax liability in the year it is claimed.
If I’m qualified for
the tax credit and buy a home in 2009, can I apply the tax credit against my
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
For a home purchase in
2009, can I choose whether to treat the purchase as occurring in 2008 or 2009,
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 2009 and a larger
credit would be available using the 2008 MAGI amounts, then you can choose the
year that yields the largest credit amount.