FIRST-TIME
HOME BUYER TAX CREDIT
Q 1. What is the $8,000 tax credit for first-time home buyers under the new law?A A first-time
home buyer as defined may receive a
refundable tax credit up to $8,000 for purchasing a principal residence in the U.S. from January 1, 2009 to November 30, 2009, inclusive. No repayment is required if the buyer owns and occupies the property for 36 months. What is a tax credit? A tax credit is a dollar-for-dollar reduction of tax owed. In contrast to a tax credit, a
tax deduction is merely a reduction of
taxable income. Hence, a tax credit is generally more valuable to the taxpayer than a tax deduction. To illustrate, an $8,000 tax deduction for a taxpayer in a 25%
tax bracket would only save the taxpayer $2,000 in taxes, whereas an $8,000 tax credit would save the taxpayer $8,000 in taxes.
Q 2. What is the significance of a “refundable” tax credit?
A “refundable” means that any credit amount not used to reduce the tax owed may be added to the taxpayer’s tax refund check. In other words, a taxpayer may receive a tax credit even if he or she has no tax liability to offset that credit. As an example, let’s say a taxpayer filing his tax returns on April 15 would have owed $2,000 to the IRS. If the taxpayer can now claim an $8,000 refundable tax credit, he can expect to receive a refund check from the IRS for $6,000.
Q 3. Who is eligible as a “first-time home buyer” for the $8,000 tax credit? A For purposes of the $8,000 tax credit, a “first-time
home buyer” is defined as any individual (or spouse) with no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which the tax credit applies (26 U.S.C. § 36(c)(1)).
Q 4. How is the amount of the tax credit calculated? A The maximum tax credit for an individual first-time
home buyer is 10 percent of the purchase price, not to exceed $8,000 (26 U.S.C. § 36(b)(1)(A)). For married individuals filing separate tax returns, the tax credit is capped at $4,000 (26 U.S.C. § 36(b)(1). For a purchase price over $80,000, the first-time
home buyer tax credit will be capped off at $8,000. “Purchase price” under this law is defined as the
adjusted basis of the principal residence on the date such residence is purchased (26 U.S.C. § 36(c)(4)).
Q 5. Is there an income restriction to be eligible for the $8,000 tax credit? A Yes. The first-time
home buyer tax credit may be restricted by the taxpayer’s income. The tax credit starts to phase out for an individual taxpayer with a
modified adjusted gross income from $75,001 to $95,000 (or $150,001 to $170,000 for joint filers). The tax credit is eliminated entirely if an individual’s modified adjusted gross income is over $95,000 (or $170,000 for joint filers). (26 U.S.C. § 36(b)(2).)
Q 6. What is a modified adjusted gross income? A First, a modified adjusted gross income or MAGI is a taxpayer’s adjusted gross income (
AGI) plus certain items, such as IRA deductions,
student loan deductions, higher education costs, foreign income, and foreign housing deductions, among other things. Second, an adjusted gross income (
AGI) is a taxpayer’s gross income minus certain deductions, which are often called “above the line” deductions. Most tax deductions are “above the line” deductions, except itemized deductions from Schedule A and personal exemptions.
Q 7. When must a first-time home buyer purchase a property to qualify for the $8,000 tax credit?A To be eligible for the $8,000 tax credit, a first-time
home buyer must purchase a principal residence from January 1, 2009 to November 30, 2009, inclusive (26 U.S.C. § 36(f) and (h)). The deadline is November 30, 2009, and not December 31, 2009. That the deadline is not at the end of the year may work as a trap for unwary buyers.
If you have any questions feel free to contact me.
Barbara Whisenant
Your Friend in the Business
A Division of Richard Realty Groups, Inc 6986 El Camino Real, Ste. H, Carlsbad, CA. 92009 Cell: (760) 583-2107 eFax: (760) 496-1649
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