A tax credit of up to $8,000 is now available for qualified first-time home buyers purchasing a primary residence on or after January 1, 2009 and before December 1, 2009. Unlike the first tax credit enacted in 2008, the new credit does not have to be repaid. One thing is for sure, the enhanced tax credit is providing an excellent opportunity for new home buyers. It’s no secret that we are in a struggling economy and the government has been taking steps to try and revive it, especially the housing market which many say is the heart of the problems.
The American Recovery and Reinvestment Act of 2009 (The official name of the tax credit) has a few key components that home buyers should be aware of. Most importantly … it’s for first time home buyers and the credit does not have to be paid back. The credit is equal to 10% of the homes purchase price or a maximum of $8,000.00, and is available for any home bought on or after January 1, 2009 and before December 1, 2009. Single taxpayers with an annual income up to $75,000 and married couples with an income up to $150,000.00 can receive the tax break.
So with all this talk about first time home buyers lets be sure that you understand exactly what the government defines as a first time home buyer. The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the past three-year period prior to the new home purchase. In addition for married couples, the law looks at both parties individually but it affects the couple as one. In other words, if you have not owned a property in the past three years but your spouse has owned a principal residence, neither you or your spouse qualify for the tax credit.
However, the tax credit can work for unmarried joint purchases where one party can allocate the credit amount to any buyer who qualifies as a first time buyer. So a parent may jointly purchase a home with a son or daughter allowing the child to get the tax credit. In addition, ownership of vacation or rental properties that are not used as primary residence do still qualify as first time home buyers for the tax credit.
Now let’s take a closer look at the income limits and what all the small legal print exactly means. It’s funny as I sit here and type this, a phrase that a good friend says popped into my head. He would always say “Check the fine print, because what the good Lord giveth the fine print take away”. Now what the income limits state specifically is that the tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) more than $75,000 for single buyers and $150,000 for married couples who file joint tax returns. If an individual makes greater than $95,000 or a couple makes greater than $170,000.00 then the tax credit is reduced to zero. For individuals and couples who’s MAGI falls in between these ranges the tax credit is reduced proportionally.
Okay so I can just feel a few of your sitting there reading that last part and scratching your heads thinking ”I thought you were going to explain this for us in easy terms”. We are so — let’s first define exactly what this MAGI means. The IRS defines MAGI as the Modified Adjusted Gross Income. To find yours you must first determine your “adjusted gross income” or “above-the-line deductions”, keep in mind this number is before itemized deductions from Schedule A or personal exemptions are subtracted. Simply put on your 1040 and 1040A tax forms your AGI. It appears as the last number on page 1 and the first number on page 2. If you use the 1040-EZ, then your AGI shows up on line 4. It is important to understand that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
Remember that was to discover your AGI, we still need to get to the MAGI and in order to do that we need to add to the AGI any foreign income, foreign-housing deductions, student-loan deductions, IRA-contributions deductions and deductions for higher-education cost as well. Once you have done that the number that is sitting in front of you is your current MAGI. To reiterate if your MAGI is over the limits either individually ($75,000) or jointly ($150,000) you still possibly can get partial credit of less than $8,000.
If you are like me you might work best with examples so let’s do one for both individuals and couples. Assume a single home buyer has a MAGI of $80,000, that buyer exceeds the single limit of $75,000 by $15,000. We take the $15,000 (amount over the limit) and divide it by $20,000 you get a 0.75 yield. Subtract that 0.75 from 1.0 and the result is .25, we then multiply $8,000 by the .25 and we discover that the homebuyer can still receive a tax credit of $2,000.
The same holds true for a married couple, for our example let’s say jointly they make $160,000 and the maximum amount is again $150,000 which means they are $10,000 over the limit. We take the $10,000 and divide it by $20,000 and we get a 0.5 yield. Subtract that 0.5 yield from 1.0 and we are left with 0.5. Then to determine their tax credit we take $8,000 and divide it by 0.5 to discover they still qualify for a $4,000 tax credit.
Another nice plus is that the law allows you to elect (choose) a qualified home purchase in 2009 as if the purchase occurred on December 31, 2008. I know, what does this mean for you? Well what it means is that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed. (Tax filling for 2008 returns instead of for your 2009 returns) This is a nice benefit to you the buyer because you know your 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
Taxpayers buying a home who do wish to claim it on their 2008 returns, but have already submitted them to take advantage of the $7,500 tax credit but qualify for this tax credit can file an amendment to your 2008 tax returns (form 1040x) and then use the new tax credit that you will not have to repay.
Please remember ASG Investments is not a tax authority, and what we have just provided are examples of how the tax credits might be applied in different circumstances, you should always consult your tax advisor for information related specifically to you. Sorry folks, I had to get that disclaimer out of the way.
Stay Tuned for Part 2 coming 03/05/09. Please feel free to contact us with any questions that you may have.
By: Antoine and Shonda Grier
ASG Investments, LLC
Tags: 2007 tax credit, 2008 New housing tax credit, 2008 tax credit, buying a new home, buying real estate, economic stimulus, financial assitance, First Time home buyers, Foreclosure, home buyers, house for sale, housing market, Housing Tax credit, mortgage, new home, New Home Purchase, Real Estate, stimulus program, Tax Credit