Tax Credit to Help Georgia Home Buyers
In the midst of one of this countries deepest recessions comes one of it’s greatest opportunities, for new homebuyers. With mortgage rates and housing prices at an all time low, there has never been a better time to buy a new home. And The American Recovery and Reinvestment Act of 2009 has provided yet another tool to help Georgia families on the road to homeownership. Along with securing a home loan and a good real estate agent, Georgia Homebuyers should begin planning now to take advantage of a new tax credit that will supplement, or even provide, the downpayment for that new home.
The following section will provide questions and answers to help new homebuyers understand how the tax credit can, and will, work for them.
Am I eligible for the tax credit?
First-time home buyers purchasing any type of home—new, resale or foreclosure—are eligible for the tax credit. A home purchase must occur on or after January 1, 2009 and before December 1, 2009, to qualify for the tax credit. The qualifying purchase date is the date when closing occurs and the title to the property transfers to the new home owner.
Do I qualify as a first-time home buyer?
A “first-time home buyer” is defined as a buyer who has not owned a principal residence during the three-year period prior to the purchase. The definition applies to the homeownership history of both the home buyer and his/her spouse, for married homebuyers. For example, if you have not owned a home in the past three years but your spouse has owned a home in that time, neither you nor your spouse may qualify for the first-time home buyer tax credit. However, unmarried joint purchasers may assign the tax credit to whichever one qualifies as a first-time homebuyer (i.e. a parent purchases a home with a son or daughter). Also, a homebuyer may still qualify as a ‘first-time’ homebuyer if the property they own is a vacation home or rental property, and not used as a principal residence.
How will my tax credit be calculated?
The tax credit is calculated as 10 percent of the home’s purchase price up to a maximum of ,000.
Is there an income limit for the tax credit?
Yes. Single taxpayers have an income limit of ,000; the limit for married taxpayers filing a joint return is 0,000. For homebuyers with a modified adjusted gross income (MAGI) of more than ,000, and filing a single tax return, and 0,000, for married homebuyers filing a joint tax return, the tax credit amount is reduced. As a final adjusted limit, the tax credit amount is reduced to zero for taxpayers with a MAGI of more than ,000 (single) or 0,000 (married) and is proportionally reduced for taxpayers with MAGIs that fall between these amounts.
How do I know my “modified adjusted gross income”?
As defined by the IRS, to find the Modified adjusted gross income, or MAGI, a taxpayer must first determine their “adjusted gross income” or AGI. The AGI is the total income for a year minus certain deductions, not including itemized deductions from Schedule A or personal exemptions. On Forms 1040 and 1040A, the AGI is the last number on page 1 and first number on page 2 of these forms. For Form 1040-EZ, the AGI appears on line 4 (as of the 2007 form). Please note that the AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains. The modified adjusted gross income (MAGI) is determined by adding certain amounts of foreign-earned income to the AGI . Please see IRS Form 5405 for more details.
If my modified adjusted gross income (MAGI) is above the limit, can I still qualify for the tax credit?
Possibly. Depending on your income, you may qualify for a partial credit of less than ,000, even though your MAGI exceeds the qualifying limits.
What is an example of how the partial tax credit is determined?
Assume that a married couple has an MAGI of 0,000. The qualifying income limit for the tax credit is 0,000, therefore the couple is ,000 over the limit. They would Divide ,000 by ,000 (the final adjusted limit range) which yields 0.5. They would then subtract 0.5 from 1.0, the result is 0.5. To determine the final first-time home buyer tax credit amount that is available to them, they would multiply ,000 by 0.5. The result is ,000. Or, assume that a single home buyer has a modified adjusted gross income of ,000. The home buyer’s income exceeds ,000 by ,000. They would Divide ,000 by the adjusted limit range of ,000 which yields 0.65. When they subtract 0.65 from 1.0, the result is 0.35. Multiplying ,000 by 0.35 shows that the home buyer is eligible for a partial tax credit of ,800. Please remember that you should always consult your tax advisor for information relating to your specific scenario, as these examples are intended to provide a general idea of how the tax credit might be applied in different instances.
How is this home buyer tax credit different from the tax credit that was enacted in July of 2008?
The most significant difference is that this tax credit does not have to be repaid. The previous “credit” was in effect an interest-free loan. This new tax incentive is a true tax credit. However, and this is very important, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Although certain exceptions apply.
How do I claim the tax credit? Is there a form or application to fill out?
Claiming the tax credit is easy. 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. No other applications or forms 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.
Is the tax credit only for certain types of homes?
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. Principal residence is defined identically to the method used to determine whether you may qualify for the 0,000 / 0,000 capital gain tax exclusion for principal residences.
What does it mean that the tax credit is “refundable”?
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 ,000 and had tax withholding of ,000 for the year, then without the tax credit the taxpayer would owe the IRS ,000 on April 15th. Suppose now that the taxpayer qualified for the ,000 home buyer tax credit. As a result, the taxpayer would receive a check for ,000 (,000 minus the ,000 owed).
If I have already filed to receive the ,500 tax credit on my 2008 tax returns, for a home I purchased in early 2009, can I submit a claim for the new ,000 tax credit instead?
Home buyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.
Do I still qualify for the tax credit if I hired a contractor to construct a home on a lot that I already own?
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 before December 1, 2009. In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.
If I finance the purchase of my home under a mortgage revenue bond (MRB) program, can I still claim the tax credit?
Yes. The tax credit can be combined with the 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.
Can I claim the tax credit even if I am not a U.S. citizen?
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.
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 ,000 in income taxes and who receives an ,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 ,000 in income taxes. If the taxpayer receives an ,000 deduction, the taxpayer’s tax liability would be reduced by ,200 (15 percent of ,000), or lowered from ,000 to ,800.
Can I claim this tax credit for a home I purchased in 2008?
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.
If I am in the home buying process, can I access the tax credit money before I file my 2009 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 downpayment. 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. Further, 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. Some state housing finance agencies, such as the Missouri Housing Development Commission, have introduced programs that provide short-term credit acceleration loans that may be used to fund a downpayment. Prospective home buyers should inquire with their state housing finance agency to determine the availability of such a program in their community. The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs, which can be found here.
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 amount. Taxpayers buying a home who wish to claim it on their 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.
If I purchase a home in early 2009, can I choose whether to use the 2008 or 2009 tax credit, depending on which amount is the largest?
Yes. If the applicable income phaseout 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.
For more information on how the federal tax credit can help make your first home a reality, please contact us via email, with your contact information and desired goal. Or, complete a brief online application.
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