$7500 First Time Homebuyer Tax Credit

Farm House with Rising SunUpdate 2/12: The $15,000 provision has been replaced by an $8,000 first-time home buyer credit, according to the Wall Street Journal. The credit is set to expire November 30th unless it is extended (which is currently being discussed).

Senate Republicans added a provision that would make the credit a $15,000 tax credit for all home-buyers, not just first time home-buyers. It would also be a true credit, not a “credit” you have to pay back over 15 years.

One of the big pieces of the housing rescue bill, passed and signed into law in July, was a $7,500 “tax credit” for first time homebuyers. While experts aren’t sure whether it’s “going to work,” these types of tax credits have been used in the past so they do have some history.

There is one aspect of this bill that is surprising and it has to do with one of the qualification rules. You can own a vacation home or a rental property and still qualify for this tax credit. I don’t know if it’s an oversight because of the strict determination of “primary residence” or if it was an intended rule. I don’t think individuals who own rental property or vacation homes necessarily need assistance on buying a primary residence.

First Time Homebuyer Tax Credit Rules

To qualify, you must satisfy these conditions:

  • The home much be purchased as a primary residence.
  • You must not have owned a primary residence in the last three years. For couples, both individuals must not have owned a primary residence in the last three years. Vacation homes and rental properties don’t affect this (you aren’t DQ’d if you have a vacation home or rental property).
  • Must not be a non-resident alien as defined by the IRS in Publication 519.
  • Individuals must have a modified adjusted gross income of less than $75,000 annually and couples MAGI of less than $150,000 to qualify for the full amount.
  • The phaseout range begins at $75,000 and ends at $95,000 for individuals, $150,000 and $170,000 respectively for couples.
  • The home must be closed between April 9th, 2008 and July 1st, 2009.
  • No mention of a credit score or history requirement, but knowing that will help when it comes to getting a mortgage. I recommend checking out, a service of Fair Isaac, the people who invented the FICO credit score.

How the “tax credit” works:

  • The tax credit is 10% of the home’s sale price with a maximum of $7500.
  • You can claim the credit on taxes filed in 2008 or 2009.
  • It’s a credit and not a deduction (difference between tax credit and tax deduction).
  • “Tax credit” is a misnomer because it’s really a zero percent loan with some qualifications.

Tax Credit Loan Repayment Terms

The tax credit isn’t really a tax credit, it’s really just a tax free loan with some qualifications. You have to start paying back this loan within two years and you make equal payments over 15 years. When you sell your home, any profits will go first into paying off that loan. If you sell at a loss, the difference will be forgiven… meaning you will not owe any money on the loan (though it should be recorded as income as is typical with most loan forgiveness agreements, so you will owe taxes on it).

Should You Do It?

I would, why wouldn’t you take an interest free loan? 🙂

(Photo: orvaratli)


Comprehensive Guide to IRS Income Phase Outs Rules

As you may well know, your modified adjusted gross income (MAGI) will determine what sort of tax benefits you’ll be eligible for. What you may not know, is how your MAGI will determine those benefits and what benefits fall under the phase out rules. You probably don’t know that because it’s not all written down in one place… until now. The majority of these fall into one of two categories, education-related or retirement-related, and it’s a great example of how you can change behavior through tax laws. The government wants to help you prepare for the future and stop being stupid.

First off, the IRS defines adjusted gross income as your gross income minus adjustments, which happen to all be deductions but do not include the standard or itemized deductions. Some of these adjustments are the IRA deduction, student loan interest deduction, tuition and fee deduction, moving expenses, etc. The modified adjusted gross income is your AGI plus some of the stuff that you deducted put back. For more information, please refer to on both topics.

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Claiming the Energy Savings Tax Credit

One of the main reasons why I purchased new windows and sliding glass doors for my home was because I cashed out vacation time from my former job, approximately two and a half weeks worth of pay, which helped soften the blow of a $7,000 purchase. Another reason why I purchased them now was because of the Energy Policy Act of 2005 which provided me the opportunity to claim a tax credit of 10% on the new windows and doors, up to $500. Since the total cost of the project was $7,000, I’ll be able to claim the $500 as long as the windows and doors qualify and the installation cost is under $2,000 (installation costs are not included in the deduction). On the first point, windows and doors must meet 2000 IECC & Amendments to qualify. As for the second, I will have to call up Castle to find out how much was “installation” and how much was for materials.

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Tax Relief 101 – Retirement Savings Credit

Welcome to the next installment of Tax Relief 101, where I find interesting and legitimate ways to relieve your tax burden. This time, we’re going to look at the retirement savings credit that I didn’t even know about until today. Basically if you make under $25,000 and contribute to a retirement account, the government is willing to give some of that money back to you as a tax credit today (as much as $1,000). It’s an incentive for low-income earners to put away money for their retirement.

The form you must file to get this is F8880, Credit for Qualified Retirement Savings Contribution. Essentially, the math is as follows:

’04 Traditional/Roth IRA contributions
+ ’04 retirement plan contributions
– distributions since 2001,
whichever is smaller.

Then, based on your salary, you divide that number by 2 [< $15k], 5 [$15k-$16.5k], or 10 [$16.5k-$22.5k] (a Bankrate article has the full table). That means the maximum credit you can get for this is $1,000.

What this allows you to do is if you’re one of the few folks earning the lower end of one of the brackets, just contribute some more to your employer’s retirement plan and push yourself down into a lower bracket. This will give you the benefit of reducing your taxable income and earning you the credit. The restrictions are what you’d expect: you cannot claim this if you’re a full-time student, younger than 18, or claimed as a dependent.

Finally, if you decide to claim this credit, you’ll need to file Form 1040 or Form 1040A, the 1040EZ isn’t allowed.

I hope you’ve found this tip helpful!


Your Tax Return as a Subtle Financial Planner

I forget what show I was watching, but it was one of those shows where you have all that Bloomberg ticker crap taking up 75% of the screen and little faces jibber jabbering in the leftover space, but the guy talked briefly about how your IRS 1040 (the full incarnation of the form everyone fills out for taxes) gives you subtle reminders of the things you should do to help plan your financial future. I didn’t watch the whole thing but I thought it’d be fun to go through each relevant line (yeah, I’m a sadist) and see how it could be used as a subtle yearly financial plan reminder.

Line 8a – Taxable Interest
Line 8b – Tax-exempt Interest
There are investment vehicles out there that are tax exempt at certain government levels. For example, an EE/E bond is exempt from State and local income taxes but not from federal taxes. This is a reminder that sometimes your most conservative assets may be better placed in a tax-exempt bond than in a savings account bearing 3.0%. Of course, you sacrifice flexibility but you should know tax-exempt investments are out there but you do keep Uncle Sam’s grubby little paws off your loot.

Line 13 – Capital gain or (loss)
This is something you can only capitalize on if you remember it before December 31st. If you have a loss and want to write it off, sell it to offset a gain you may have had. Just remember not to repurchase shares in the same company within 31 days or the “wash” rule will bite you (and you won’t be able to write off the loss). Did you buy shares of JDS Uniphase and got burned badly in the bubble? Yeah, me too, write it off now because they’re never going to break even for you.

Line 15a – IRA distributions
Line 25 – IRA deduction
Contribute to a Roth or any other type of IRA? These lines are a reminder that perhaps you should be planning for your retirement because Social Security won’t be enough to sustain a lavish retirement lifestyle! 🙂 Retirement planning, especially for young workers, is critical because it is something that benefits with the passage of time. The more you sow now, the greater the benefits you will reap in the future. You want to be living in luxury when you’re retired, not a cardboard box. (You cannot deduct Roth contributions on your return, I just intended for that line to serve as a reminder to plan for retirement)

Line 33 – Penalty on early withdrawal of savings
Tsk tsk! That IRA or 401k isn’t a slush fund you can withdraw on to buy that shiny [whatever]. Let line 33 be a reminder that you will be penalized for mortgaging a portion of your retirement for gratification now. Alright, I’m just kidding about the severity but you should be readily dipping into your retirement for every thing. Sometimes it makes financial sense, but most (90%) of the time it’s a bad idea. (Example of good ideas? In times of hardship, dipping into the retirement savings may be unavoidable)

Line 49 – Education credits
The government will help you educate yourself, even if your employer will not. Learn about Hope Credit and Lifetime Learning Credits and see how you or your dependents may benefit from them.

Unless I’ve missed anything glaring, those 5 “lines” cover a lot of the basic financial planning advice given out these days. Consider all investment opportunities with respect to the tax advantages, plan for your future, don’t mess up your future by needlessly borrowing from it, and always educate yourself. I’m not saying that the dreaded tax form should be your financial advisor, a human being almost always beats a piece of paper, but it gives you a couple subtle reminders for things you may have forgotten or conveniently ignored. Take a look at your return and see if you’ve taken advantage of everything you could’ve.


Tax Relief 101 – Deducting State Sales Tax (vs. State Income Tax)

This article has been made somewhat obsolete for 2006 (2005 tax year). The rules are the same but the documents you reference have changed. See the note at the end of the article.

Welcome to the second article in a series I call Tax Relief 101 designed to help you save some cash from the tax man. You can see the whole collection under the category of Tax Relief 101.

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Tax Relief 101 – Education Credits (Lifetime & Hope)

Welcome Tax Relief 101, a series of articles I plan on writing that will help you take advantage of the some tax breaks many folks don’t know very much about. I will churn up the tax manuals and give you a summary that will make sense to normal people and not just number crunchers. You can see the whole collection under the category of Tax Relief 101.

There are two types of education credits available: Hope Credit and Lifetime Learning Credit. Everyone in your tax family (you, spouse, dependents) can claim either of the credits but not both. How much credit you receive depends on what you’ve paid for “qualified tuition and related expenses” (which we will discuss later) and your modified adjusted gross income (mAGI).

“Qualified Tuition and Related Expenses”
Qualified – tuition and fees required for attendence/enrollment (to an institution eligible to participate in the Dept. of Education’s student aid program, i.e. if you have doubts, it probably isn’t eligible). Books, supplies, and equipment if necessary for attendence. Finally, student activities fees if they must be paid for attendence/enrollment.

Example: A student activities fee for usage of campus facilities is valid if all students must pay. A fee for student tickets to sporting events are not valid because it is optional.

Now we’ve covered who is eligible (people in your family) and what they are expenses eligible (they basically must pass the smell test), let’s investigate the specifics of either.

Hope Credit: Each student is only allowed to claim this credit twice (two years) and allows for $1,500 of benefits (structured as 100% of the first $1,000, 50% of the next $1,000; so you will need to spend $2,000 for full benefits). It is also phased out if your mAGI is between $42k and $52k and completely gone if your mAGI is above $52k. There are additional rules for eligibility:
1. Hasn’t completely two years of post high school work (ie. not a junior or senior).
2. Was enrolled in a “recognized educational credential” for at least an academic period.
3. Going to school at least half time.
4. Free of conviction for any drug charge (felony possession/distribution at the federal or state level)

Lifetime Learning Credit: So Hope is for the first two years, Lifetime is for the rest of your life. It’s 20% of the first $10,000 paid for all eligible learners in your family. The eligibility requirements are looser (you don’t need to be going half-time to a school giving our real degrees) and you can claim it as many years as you want. One downside is that the credit is reduced if your mAGI is between $42k and $52k.

I hope this has opened up your mind a little to look at other tax breaks if you don’t qualify for either of the Hope or Lifetime credits. Check back again soon for discussions of other financially beneficial tax breaks.

Related Articles:
IRS Publication 970 – This is IRS document we summarized. It’s pretty readable but we’ve boiled down the generalities in this article.

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