March 30, 2009

As part of the American Recovery and Reinvestment Act of 2009, eligible first-time homebuyers can get up to $8,000 from the government in the form of a refundable tax credit, and can even expect the cash to arrive quickly (within 10 days of filing) with certain "strategizing." But, as with most tax-related legislation, this credit is laden with qualification requirements that must be followed before any checks will be mailed out.

Note: A "refundable tax credit" means a taxpayer can claim the credit even if he or she has little or no income tax liability to offset. For example, say you owed $3,000 in federal taxes on your 2008 return, but you qualify for the maximum first-time homebuyer credit, you would pay the government nothing AND you would get a check for $5,000. Even better, if you were due to get a refund of $2,000, for example, and qualify for the maximum first-time homebuyer credit, now you would get a check for $10,000

Qualifying homes that can be purchased are expansive in type. Virtually all residences—single family, townhome, condominium, mobile home, even a house boat—fall under the purview of this legislation, so long as you use it as a principle residence. Even new construction is included.

Purchase means any acquisition, except one from a person related to you (such as your parents or your grandparents), and except if you inherited the property or it was otherwise gifted to you.

While $8,000 is the maximum possible credit, every taxpayer will not necessarily qualify to claim that full amount. The amount of credit that can be claimed depends on two things: 1. the purchase price of the property; and 2. the taxpayer's income.

In general, you can claim 10 percent of the purchase price of the property, up to $8,000. This means, if you purchase a property for $70,000, the maximum credit you may claim, assuming all other eligibility requirements are met, is $7,000. Any purchase price of $80,000 or above, assuming all other eligibility requirements are met (see below), will yield an $8,000 credit. Note: Allocating the allowable credit may get tricky when multiple purchasers are involved. If you are married and filing separately, and both you and your spouse are first-time homebuyers, you can each claim half the credit on your individual return; this is the only allocation method allowed.

But, if two eligible, unmarried, individuals purchase a home together, they may allocate the credit between them using "any reasonable method," which may include 100 percent to one individual. TIP: it would be wise for the parties to execute an agreement confirming their agreed allocation at the time of closing so the issue is resolved between them. As discussed above, if only one purchaser is eligible, he or she may be allocated 100 percent of the credit. Even assuming a purchase price of $80,000 or more, you may not be eligible for the full credit, or any of the credit for that matter, if your income exceeds certain thresholds. This is known as "phasing out." The portion of the credit you may claim based on your income is determined as follows:

1. Full credit: if your "modified adjusted gross income" (MAGI) is less than $75,000, or $150,000 if married filing jointly, you may claim the full amount of credit available based on your purchase price;

Note: MAGI is determined by first looking at "adjusted gross income" (AGI). AGI is total income for the year (e.g., wages, salaries, interest income, dividends and capital gains), minus certain deductions (known as "above-the-linedeductions"). This first calculation is made based on values before itemized deductions from Schedule A (or personal exemptions) are subtracted.

Next, certain amounts are added to AGI to arrive at MAGI (e.g., foreign income, foreign-housing deductions, student loan deductions, IRA-contribution deductions, and deductions for higher-education costs).

2. Partial credit: if your MAGI is more than $75,000, or $150,000 if married filing jointly, but less than $95,000, or $170,000 if married filing jointly, you may only claim a portion of the credit available based on your purchase price. The calculations for determining the value of the partial credit are based on a specific formula issued by the Internal Revenue Service (IRS); and

3. No credit: if your MAGI exceeds $95,000, or $170,000 if married filing jointly, you cannot claim any credit, regardless of the purchase price of your property.

In order to claim the credit, you must purchase (and by purchase, the IRS means actually close the transaction) between January 1, 2009 and December 1, 2009.

Note: Under the previously enacted Housing and Economic Recovery Act of 2008,

taxpayers who purchased (i.e., closed on) a home on or after April 8, 2008 may qualify for a maximum $7,500 credit (with the same additional eligibility requirements discussed above). However, this credit acts more as an interest-free loan, rather than an actual credit, because it must be repaid over 15 years (in 15 equal installments). Nonetheless, the possible $7,500 "credit" remains available to qualifying purchases made in 2008.

The credit can be claimed on either your 2008 or 2009 tax federal tax return. But, one option may be more beneficial than the other, depending on your situation.

For example, income levels may change from 2008 to 2009, perhaps due to loss in investment income or unexpected loss of employment. Taxpayers who expect lower income in 2009 may actually qualify for a higher credit on their 2009 return due to the "phase out" provisions. Therefore, it would make more sense to wait to make the claim in order to maximize the benefits.

For taxpayers who can fully maximize the credit on 2008 returns, there are further filing strategies:

1. If you already filed your 2008 return, and already made an eligible purchase, you can now file an amended return or refund form, rather than wait until next year.

TIP: file Form 1045 for a refund on taxes paid rather than an amended return. This form accelerates refunds for individuals so that they can receive the cash more quickly. Plus, the IRS has added operations to ensure timely processing, given the expected influx;

2. If you have not already filed, but won’t close on your purchase before the April 16, 2009 filing deadline, you can file an extension. Then, you have until October15, 2009 to file and claim your credit, rather than waiting until next year. If you file electronically, you can still receive a refund within 10 days by direct deposit; or

3. If you are one of the lucky already expecting a refund on your 2008 return, and you want that money now, you can file your return timely, and later amend it once you’ve closed on the new purchase.