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How the stimulus package may help new home buyers
The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after Jan. 1 and before Dec. 1 this year. The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax adviser or legal professional about your situation.

Q: Who is eligible to claim the tax credit?

A: First-time home buyers purchasing any kind of home — new or resale — are eligible.

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. For married taxpayers, the law tests the homeownership history of both the home buyer and his or her spouse. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.

Q: How is the amount of the tax credit determined?

A: The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

Q: Are there any income limits for claiming the tax credit?

A: The tax credit amount is reduced for buyers with a modified adjusted gross income of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced to zero for taxpayers with modified adjusted gross income of more than $95,000 (single) or $170,000 (married).

Q: What is “modified adjusted gross income”?

A: Modified adjusted gross income is defined by the Internal Revenue Service. To find it, a taxpayer must first determine “adjusted gross income.” Adjusted gross income is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted. Note that adjusted gross income includes all forms of income including wages, salaries, interest income, dividends and capital gains. To determine modified adjusted gross income, add to adjusted gross income certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education.

Q: If my modified adjusted gross income is above the limit, do I qualify for any tax credit?

A: Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose modified adjusted gross income exceeds the phase-out limits.

Q: How is this home buyer tax credit different from the tax credit that Congress enacted in July?

A: The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous credit was essentially an interest-free loan. This tax incentive is a true tax credit. However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply.

Q: How do I claim the tax credit? Do I need to complete a form or application?

A: Participating in the tax credit program 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.

Q: What types of homes will qualify?

A: Any home that will be used as a principal residence will qualify for the credit.

Q: I read 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 of the amount of the refundable tax credit.

Q: Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?

A: Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the homeowner is treated by the tax code as having been “purchased” on the date the owner first occupies the house.

Q: Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond program?

A: Yes. The tax credit can be combined with the mortgage revenue bond 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 a mortgage revenue bond program.

Q: I am not a U.S. citizen. Can I claim the tax credit?

A: 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.

Q: I bought a home in 2008. Do I qualify for this credit?

A: No, but if you purchased your first home between April 9 and Jan. 1, you may qualify for a different tax credit.

Q: 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?

A: Yes. The law allows taxpayers to choose (”elect”) to treat qualified home purchases in 2009 as if the purchase occurred on Dec. 31, 2008. This means that the 2008 income limit (modified adjusted gross income) applies and the election accelerates when the credit can be claimed. A benefit of this election is that a home buyer in 2009 will know the 2008 modified adjusted gross income with certainty, thereby helping the buyer know whether the income limit will reduce the credit amount.

Source: www.federalhousingtaxcredit.com