A Tax Fact from The Tax Institute at H&R Block

Yes, it’s confusing, but because of the 2009 Economic Stimulus that was signed into law on Feb. 17, 2009, there are effectively ‘two’ first-time homebuyer credits, and both can impact your 2008 federal return.

First-Time Home Buyer Credit 2008
As part of the Housing and Economic Recovery Act of 2008, eligible first-time homebuyers can receive a refundable credit of up to $7,500.

The credit:

• Applies to home purchases made after April 8, 2008, and before January 1, 2009
• Is equal to the lower of 10% of the purchase price of the home or $7,500 for most taxpayers ($3,750 for married filing separate filers)
• Is phased out based on modified adjusted gross income (MAGI). For a married couple filing a joint return, the phaseout range is $150,000 to $170,000 of MAGI. For other taxpayers, the phaseout range is $75,000 to
  $95,000 of MAGI
• Reduces a taxpayer’s tax bill or increases his or her refund, dollar for dollar
• Is fully refundable, meaning that the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax that they owe.
• Is claimed on the 2008 return

Eligible taxpayers must not have owned a home at any time during the three years prior to the purchase. Eligible taxpayers claim the credit by filing IRS Form 5405 on their 2008 tax return. Form 5405, along with instructions on using the form to claim the first-time homebuyer credit, is available on the IRS website. If you may be eligible for the credit, you may wish to speak first to your tax professional for assistance in preparing your return.

For a home purchased in 2008, the credit must be repaid, making it more of an interest-free loan than an actual tax credit. The maximum repayment period is 15 years, but this period applies only if the property remains the taxpayer’s main home and is not sold, foreclosed on, or converted to business or rental property during that 15-year period.

If such changes take place, the buyer may have to repay the outstanding credit amount back to the government right away. Fortunately, the recapture of the credit in this situation cannot exceed the gain realized from the sale or other disposition.

Taxpayers who purchased their homes in 2008 must begin repaying it as an additional tax added to their returns beginning in 2010. The credit repayment amount is added to the taxpayer’s tax liability each year of the repayment period as an additional tax.

Taxpayers should consider the credit recapture amount when computing estimated income tax payments or withholding taxes to avoid underpayment penalties.

First-Time Home Buyer Credit 2009
There’s better news for first-time homebuyers in 2009!

For eligible first-time homebuyers who purchase a home on or after Jan. 1, 2009 and before Dec. 1, 2009, the first-time homebuyer credit is increased from $7,500 to $8,000 and, and. . . this is BIG, . . .the individual no longer has to repay the credit unless the home owner sells or moves out of the home within 3 years of purchase.

As under prior law, the $8,000 credit begins to phase out for individuals with MAGI over $75,000 ($150,000 for married couples filing jointly). It is fully phased out for individuals with MAGI of $95,000 ($170,000 for joint filers).

Tax Year 2008 Return Filing
The IRS has modified the 2008 Form 5405 to incorporate the new law as it applies to individuals who purchased a home in 2009 and want to take the credit on their 2008 return. As of 2/24/09, the new Form 5405 is not able to be electronically filed. So, you can go ahead and postal mail your form and tax return, until the IRS has enabled the electronic filing of this form.

If you’ve already filed your 2008 tax return and qualify for a credit greater than $7,500, The Tax Institute at H&R Block recommends that you file an amended return (Form 1040X) to claim the additional credit, up to $500.

• If you haven’t yet filed your 2008 return, you may file a paper return now or wait to e-file your return until Form 5405 may be electronically filed.
• If you purchased your home in 2009, you may wish to wait until you file your 2009 return (in 2010) to claim the credit. Generally, it would be financially wisest to claim the credit on the 2008 return so that you can receive this credit as soon as possible.

The best advice is to always talk with your tax professional to determine a course of action that may be best for your individual financial situation.

This Tax Fact is brought to you by The Tax Institute at H&R Block.

To view other helpful tax information or listen to our Tax Fact podcasts, visit www.digits.hrblock.com

As always . . . everyone’s tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Fact is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.