1. How does a tax credit work?
Tax credits are special provisions that reduce income tax liability on a dollar
for dollar basis. Credits are claimed on an individual’s income tax return. In this
case, Congress has created a tax credit for first-time homebuyers. The credit amount
is 10% of the cost of the home, not to exceed $8000.
2. Who can use the new tax credit?
Only first-time homebuyers are eligible to use the credit. A first-time homebuyer
is defined as an individual who has not had an ownership interest in a principal
residence in the previous three years.
3. Is there an income restriction?
Yes. The income restriction is based on the tax filing status the purchaser claims
when filing his or her income tax return. Individuals whose Form 1040 filing status
is single (or Head of Household) are eligible for the credit if their adjusted gross
income is no more than $75,000. Those who file a Joint return may have an adjusted
gross income of no more than $150,000. The credit amount is gradually reduced as
an individual’s income reaches $95,000 (single return ) or $170,000 (joint return).
Individuals with income above $95,000 ($170,000 joint return) will receive no tax
credit.
4. What if I am eligible for the full credit, but my income tax liability is less
than $8,000?
This new tax credit is a so-called "refundable" tax credit meaning the home buyer
can claim the credit even if they have little or no federal income tax liability.
If a qualified home buyer was due a $1,000 federal tax refund, they would receive
$9,000 total ($1,000 refund plus $8,000 credit). If they owed the IRS $1,000 and
then claimed the credit, they would receive a check for $7,000 ($8,000 credit minus
$1,000 owed).
5. What types of homes will qualify for the tax credit?
Any home that will be used as a principle residence will qualify for the credit
including single-family detached homes and attached homes like townhouses and condominiums.
6. Can I claim the tax credit if I finance the home under a mortgage revenue bond
(or MCC) program?
Yes. The tax credit can be combined with the Indiana Housing Finance Authority MCC
program.
7. How do I apply for the credit?
Participating in the credit program is easy. You claim the tax credit on your federal
income tax return. 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.
8. Is there any way for a home buyer to access the money allocable to the credit
sooner than waiting to file their 2009 tax return?
Yes. Prospective buyers who believe they qualify for the 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 down payment. Buyers should adjust their
withholding amount on their W-4 via their employer or through their quarterly estimated
payment. Prospective 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.
9. Does this credit have to be repaid?
The new provisions to the Federal Homebuyer Tax Credit stipulate there is no repayment
for home purchases on or after January 1, 2009 and before December 1, 2009.
10. What happens if I sell my house?
If your home is sold within three years after purchase, the entire amount of the
credit received is recaptured on the sale. In other words, the closing documents
will require the full credit amount be returned to the government from the proceeds
of the house sale.