By Steve Sloboda
Did you know that first time home buyers may be eligible to receive a government tax credit up to $7500? Well, it’s true. Last November the Government approved a tax credit for first time homebuyers that will allow them to take up to $7500 off their taxes. It’s an exciting opportunity for people to take advantage of. There have been many questions about what it is and how it is applied so I decided to put together these quick points along with some answers to frequently asked questions.
- 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 April 9, 2008 and before 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.
- The tax credit works like an interest-free loan and must be repaid over a 15-year period.
Q: Who is eligible to claim the $7,500 tax credit?
A: First time home buyers purchasing any kind of home‚Äînew or resale‚Äîare eligible for the 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.
Q: What is the definition of a first-time home buyer?
A: 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.
Q: Are there income limits to determine who is eligible to take the tax credit?
A: Yes. Home buyers who file their taxes as single or head-of-household taxpayers can claim the credit if their modified adjusted gross income (MAGI) is less than $75,000. For married taxpayers filing a joint tax return, the MAGI limit is $150,000. The limit is based on the buyer’s modified adjusted gross income for the year that the house is purchased, except for certain purchases in 2009. 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.
Q: I heard that the tax credit is refundable. What does that mean?
A: 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 the entire 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).
Q: What is the difference between a tax credit and a tax deduction?
A: 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.
Hopefully these points answer many of the questions you have regarding this exciting tax credit. If you think you qualify for this credit or want to find out more about being a homeowner please consult a tax advisor or licensed real estate agent for further information. You can also see more information at the website www.federalhousingtaxcredit.com.
Steve Sloboda is Associate Broker at Windermere Real Estate/Paragon Co. in the University Place office. Steve lives in the Oakbrook neighborhood of Lakewood with his wife Amity, and their two young children. For more information or to contact Steve direct please go to www.stevesloboda.com.