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The First-Time Homebuyer's Credit - An Interest-Free Loan from the IRS

The Taxpayer's Government Bailout
For any of you who may have or are thinking about helping to rescue the real estate market by buying your first house, be aware of the interest-free loan that you may be eligible for from the IRS - in the form of the first-time homebuyer's credit.

In general, a credit is much more beneficial than deduction because a credit reduces your tax bill or increases your refund dollar-for-dollar - unlike a deduction, which simply reduces your taxable income.

A $1000 credit means you'll get back $1000. A $1000 deduction means you may get $100 to $350 back, depending on which tax bracket you fall into.

But the first-time homebuyer's credit works a little differently than most taxpayer credits because it does have to be paid back over fifteen years. Still, it's a great deal - you can't get anything like that from your credit card or a consumer loan.

And just like every other new homeowner has found out, buying a home comes with additional expenses you may not have planned for. You may need to buy more furniture, build a fence, or do some landscaping.

You may just want to pay off some credit cards. Or, you may want to begin investing in your retirement fund. Rather than running up debt or missing out on years of compound interest, you can take advantage of Uncle Sam's generous offer of a free loan to do those things.

How it Works
To be eligible for the first-time homebuyer's credit, you must not have owned a home at any time in the three years prior to the purchase of the qualifying home.

The credit applies to home purchases after April 8, 2008 and before July 1, 2009. If you are having a home built, the day of purchase is considered to be the day you move into the completed home.

The qualifying home must be your primary residence and located in the United States. Vacation homes and rental properties do not qualify. Also, the qualifying purchase cannot be a home bought from a relative.

The first-time homebuyer's credit is 10% of the purchase price, up to a maximum of $7500 for single taxpayers or married couples filing jointly. A married filing separately taxpayer can claim half the credit, $3750.

The credit is fully refundable, meaning that eligible taxpayers will be paid the credit even if they owe no tax or the credit is more than the tax owed.

Taxpayers who claim the first-time homebuyer's credit will normally be required to begin paying back the credit starting in the second year after claiming the credit, payable in fifteen equal annual installments.

For example, if you take the maximum allowable credit of $7500 for tax year 2008, then your first payment of $500 will begin for tax year 2010.

You pay back the credit as an additional tax on your federal tax return, so you may have to adjust your withholding on your W-4 to ensure that enough tax is taken out throughout the year.

If you sell your home or cease to live in it as your primary residence - for example, you turn it into a rental - before the credit is paid back entirely, you'll have to pay back the remainder of the credit owed for the tax year that it stopped being your home.

The credit is reduced or eliminated for higher-income taxpayers, and is based on your modified adjusted gross income. The credit begins to be phased out for a married filing jointly couple at $150,000, and is completely phased out at $170,000. For other taxpayers, the phase-out range is between $75,000 and $95,000.

Unmarried persons who purchase a home together can take the credit and divide it among themselves in a reasonable manner, as long as the total credit claimed doesn't exceed the maximum allowable credit of $7500 or 10% of the home's purchase price.

To claim the credit, you'll have to attach IRS Form 5405 to your federal tax return. You'll receive the credit just as you would a regular tax refund.

Not everybody is eligible to take the first-time homebuyer's credit. Check out the IRS website for more information regarding the first-time homebuyer's credit, or consult a tax professional to determine your eligibility.

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Thursday, 09 July 2020

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