The New First-Time Home Buyer Credit

The stimulus package offers people who buy a home in 2009 a fat tax break.

By Kevin McCormally, Editorial Director, Kiplinger.com

March 2009

The new stimulus package signed into law by President Obama makes a huge change in the tax credit designed to encourage Americans to buy a first home.

Last year, Congress passed a law giving people who bought their first homes after April 8, 2008, and before the end of the 2008 a $7,500 credit on their 2008 tax return. Better than a tax deduction (which reduces the amount of income you have to pay tax on), a credit actually reduces your tax bill dollar for dollar. So, if you would otherwise owe $2,500 when you file your 2008 tax return, a $7,500 first-time home buyer credit would wipe out the bill and prompt the IRS to write you a $5,000 refund check.

That's pretty sweet.

RELATED LINKS
	What You Need to Know About the Stimulus
	Tax Breaks for Home Owners

But there's a big catch to the 2008 credit. It has to be paid back to the government over 15 years, starting with 2010 tax returns. You'll get your $7,500 now, but you have to add $500 to what you pay in income taxes each year between 2010 and 2025.

The 2009 law offers a better deal for those who buy their first homes between January 1 and November 30, 2009. Buyers get a slightly higher credit -- $8,000 rather than $7,500 -- and they never have to pay it back. (There is an exception to the no-pay-back rule: You do have to repay the $8,000 if you sell the house within three years of the time you buy it.)

And, get this: You don't really have to be a first-time home buyer to qualify. In the law, a first-timer is defined as anyone who hasn't owned a home for at least three years.

There is an income limit on this break. The right to use the credit is gradually phased out as adjusted gross income (AGI) rises from $75,000 to $95,000 on a single return or $150,000 to $170,000 on a joint return. AGI is basically taxable income before subtracting your personal and dependent exemptions and your standard or itemized deductions. If you report $160,000 of AGI on a 2009 tax return, you'd be half way through the phase-out zone, so you'd qualify for just $4,000 of credit (half of the $8,000 amount).

How to get your money

Qualifying taxpayers claim the credit (10% of the house price up to a maximum of $7,500 for 2008 buys or $8,000 for 2009 purchases) on Form 5405. This should put money in your pocket within weeks of the time you file your tax return. If you owe more tax with your return than your credit amount, it will instantly reduce your tax bill dollar for dollar. If you owe less than your first-time home buyer credit, you'll get the balance as a tax refund. Filing your return electronically and having the refund direct deposited to your bank account is the fastest way to get your money.

What if you bought in 2009 and filed your return before the credit was bumped from $7,500 to $8,000? Don't worry, you can get the extra $500 by filing an amended return. Wait until you get your refund from the first return, then file a form 1040X to claim the final $500.

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