You might have heard about the $8,000 tax credit first time home buyers could receive. Have you heard that you can apply it towards the purchase of your new home? On May 29, 2009, the secretary of the U.S. Housing and Urban Development agency (HUD) announced two new ways that you can receive this tax credit.
If you use an FHA-approved lender, you can use the tax credit towards the down payment and closing costs of the home. While your tax credit can be used for a substantial part of the down payment, FHA still requires that you put up 3.5% of your own money. Mortgages obtained through state Housing Finance agencies and other certain non-profit organizations can monetize the tax credit, reducing the amount of your mortgage. Whichever option you use, the bottom line will be a smaller mortgage and lower monthly payments.
Who Qualifies?
The tax credit is not available to everyone. To be eligible, you must be considered a first-time home owner, you must purchase the property this year and you cannot exceed the income limitations.
To be qualified as a first-time home owner, you or your spouse must not have owned a home three years prior to the purchase of the new home. The property you purchase must be used as your primary residence. You cannot buy a rental property. You can choose a single-family dwelling, a condominium, a townhouse or a co-op property. All qualify.
The residence must be purchased by December 1, 2009. Since closing on a property can take months, if you are thinking about taking advantage of this credit, don’t procrastinate, rushing through the closing process could result in costly mistakes. The credit you receive does not have to be repaid as long as you maintain the home as your primary residence for three years. If you sell the residence before three years, the credit will be deducted from the sales price.
Finally, there are income limitations on receiving the tax credit. Single taxpayers earning under $75,000 can receive the full tax credit. Phaseouts of the tax credit begin above this amount. Above $95,000, you can no longer receive the tax credit. For those filing as Married-Filing Jointly, you can receive the full benefit as long as your joint income does not exceed $150,000. Phaseouts begin above this amount to $170,000.
How Much Can You Receive?
Qualified buyers can receive 10% of the purchase price of the home up to $8,000. Thus in order to receive the full benefit, your residence must cost at least $80,000. Those purchasing residences above this amount cannot receive more.
What If?
What if you are not using an FHA-approved lender or obtaining your mortgage through an approved agency? There are still ways to receive your tax credit sooner, rather than later.
If you did not yet file your 2008 taxes, instead requesting an extension, you can include the purchase, even if it occurred in 2009, on your 2008. tax return. If you have already filed your 2008 tax return, you can amend it and receive the credit now instead of next year.
Consider taking the credit through lower deductions from your paycheck. Discuss this option with your human resources manager. If you expect your tax bill to be $8,000 less next year, add a sufficient number of extra exemptions on your W-4 form so that less taxes are taken out. Since you are a first-time home buyer, don’t forget to take into consideration additional tax reductions you might receive due to mortgage interest, property taxes and other Schedule A deductions you might now be able to receive.
Be sure to review this and other tax concepts with your professional tax adviser prior to implementing them.
Real Comprehensive Financial Plans, written by experienced, fee-only financial planners, can be very expensive. Learn more about financial plans and how to choose a planner at Comprehensive Financial Planning.
Gary Lewis, CFP, ChFC; also provides daily commentary of the stock and bond market at Asset Design Center.
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June 5th, 2009 at 4:40 am
This is a really well-written and informative article about the First Time Home Buyer Tax Credit. I’m glad you’re sharing it and I hope more people can benefit from this knowledge as I did.