First Time Home Buyers Tax Credit FAQ.

The following are a set of questions and answers regarding the First Time Home Buyers Tax Credit, which is part of the 2009 Housing Stimulus Bill. Please feel free to submit other questions to the comments box at the end.

What if my property is less than $80,000? How much will I get back?

The bill states that you will get back 10% of the purchase price of your home, up to $8,000. So, if your home cost $70,000, you will get back $7,000. As long as your home costs more than $80,000, you satisfy the purchase price requirements to get the full amount($8,000) back.

What are the income limits?

For the maximum credit, up to $75,000 for individuals, and $150,000 for married couples. This would be your AIG(Adjusted Gross Income) on your tax return. Refer to the next question for more information.

What if I make $76,000?

The government uses a strict, but easy formula. Step 1: Subtract 75,000 from your adjusted gross income. Step 2: Subtract that number from 20,000. Step 3: Divide that number by $20,000. Step 4: Multiply that number by 8,000, and BAM!

Example:

AIG = 76,000

Step 1: $76,000 – $75,000 = $1,000

Step 2: 20,000 – 1,000 = 19,000

Step 3: 19,000/20,000 = .95

Step 4: .95 * 8,000 =  $7,600

A $76,000 income would result in a maximum $7,600 tax credit.

Using our calculation, we can also determine that an AIG of $95,000 or more would not qualify for the tax credit.

Can I use the $8,000 as part of my down payment of closing costs?

No, not really.

Explanation: This would create an entire new animal, a potentially complex one at that. The IRS stays out of the contract, purchase and closing areas of buying a home. Refer to the next question for more information.

Can I access the $8,000 in any other form? Can I borrow it from the Government?

Yes and No.

You can adjust your withholding amount on your W-4 to help accumulate money to use towards a home purchase.

This is assuming that you qualify for the tax credit.

Of course, you would be 100% liable for outstanding taxes owed to the government.

I bought an apartment earlier in 2009, does this qualify?

Yes, single-family homes, condos, town homes qualify. Once again, a good Realtor would be able to help you determine what qualifies for the first time home buyer’s tax credit.

What if I miss the cutoff point?

Answer – So, let’s say that you bought your home Dec 31^st, 2008. This means you would quality for the $7500 tax credit which was in effect from April 9th, 2008 until Dec31st, 2008.  Keep in mind, the $7,500 tax credit from 2008 must be paid back. It is actually a zero interest loan from the government. So, did you really miss out on $8,000? Unfortunately, yes. However there is some gray area, but unless you have a lawyer, it’s probably not worth fighting for. Refer to the next question for a more in-depth answer.

What if I claim the tax credit, but I don’t qualify?

DISCLAIMER: First of all, it would be in your best interest to consult a tax accountant or a lawyer if you have any questions.

Answer – Ok, so let’s say you decide to claim the credit, and don’t qualify for some reason. Worst case scenario is that you get caught. The IRS could prosecute you for tax fraud. A lighter sentence would be for you to pay back the entire tax credit received with interest and late penalties. You would also probably be “flagged” by the IRS for the rest of your tax-filing years.

Keep in mind that the IRS can be unrelenting. They can have enormous resources available to them. The burden of proof is on you.  If the IRS were to audit certain tax payers that claimed the credit, they would most likely audit those that are the most suspect. Those that filed closest to the cutoff dates, potential previous home owners, etc.

What if I buy a house and rent it out?

The property in which you claim the Home buyer’s credit must be your principle residence. In general, your principle residence is where you spend the majority of your time.

I purchased my house Jan 17th, 2009 and filed a tax return claiming the $7,500 tax credit from 2008. At that time, the 2009 version did not exist. What can i do?

Good news! You can file an amended 2008 tax return to claim the $8,000 tax credit. This is basically “backing out” of the 2008 tax credit, and claiming the 2009 tax credit. Remember, the $7,500 from 2008 is a loan that must be paid back. The $8,000 is basically a free check from the government. (subtract tax liabilities of course). If you are willing to wait, another option is to simply file the tax credit on your 2009 tax return. I’ve read that if you file an amended return, it has been taking from 3 weeks up to 16 weeks or more to fully process.

July, 2009 UPDATE – Rumor mill is that quite a few of the amended tax returns are being flagged for audit. Perhaps this is why it’s taking so long.

BTW, Looking for amended tax return information? here is the IRS Customer Service number: 1-800-829-1040

Housing Stimulus Package – First time home buyer’s tax credit.

If you’ve been on the fence about buying a new home, keep in mind that the government’s First-Time Home Buyer’s tax credit expires December 1^st, 2009.  The tax credit is equal to 10% of the price of the house, up to $8,000 max. Income limits are $75,000 for individual and $150,000 for married couples. Even if you do not fit these numbers, you can still qualify. See my First Time Home Buyers Tax Credit FAQ post for details.

When purchasing a home, there are many steps involved. First, it would be a good idea to meet with a lender to determine how much of a mortgage loan you qualify for. If you have an account with a Credit Union, I would try them first. Otherwise, try your bank. Different lenders using slightly different methodologies, so it would be wise to shop around for different rates. The loan officer will run your credit, look at your debts, assets and income, and give you a general idea of how much money they are willing to lend you for a house.  Some lenders will estimate a good amount with a good rate, but then raise the rate when it comes time for formal proceedings such are your pre-approval.

As far as working toward shopping for a house and all the details involved, I cannot stress the important of using a good Realtor. A good Realtor will be able to answer most questions you have about home buying. Below are some helpful tips and nuggets of knowledge about the housing stimulus tax credit:

-The American Recovery and Reinvestment Act of 2009 is basically a set of provisions that were added onto, or changed from the Housing Stimulus Bill that was passed in 2008.

• This is for first time home buyers only! What constitutes a first time home buyer? The individual may not have owned a home 3 years prior to purchase.

• You must also own the property for 3 years after the purchase date.

• The credit will come in the form of a tax return. Tax liability will be satisfied before any refund is given to the claimer. Example: If I owe $1,500 in taxes, I would get back only $6,500.

• The qualifying purchase date for this is Jan 1^st, 2009 to Dec 1^st, 2009. If you purchased a home prior to Jan 1^st, 2009, you fall under the 2008 first time home buyers credit which came into effect April 9^th, 2008.

• Do not rush into buying a home just to claim the credit. This can be catastrophic.

If you are experienced in real-estate and house flipping, a foreclosed house can yield a healthy profit. Otherwise, there are several things that can go wrong.  If you are new to real-estate, consider a pre-foreclosure. Refer to my First Time Home Buyers Tax Credit FAQ post for more details about the first time home buyer’s credit.

Should I contribute to my 401k? Should I start a 401k?!?

This post was inspired by the fact that a majority of people lost money in the recent economic conditions. 401ks and other various retirement accounts lost an average 30% in 2008 according to Fidelity. But don’t panic.

This is very important:

The economy is cyclical!

Historically, diverse funds ride the economy.

First of all, the majority of IRAs(Individual Retirement Accounts) use different funds. A fund is a collection or portfolio of different stocks and/or bonds, or other investments.

The S&P500, a collection of 500 different stocks, is a very commonly used fund.

Looking at a S&P500 graph, from 2002 to 2007, an investment would have doubled. However, from 1999 to 2002, you would have lost almost 40% of your money. What is my point? You can lose money, but you can gain it right back. Get in when it’s low, and get out when it’s high. In July of 2009, the S&P is at a low point. Nobody knows what will happen, but historical data shows downturns provide lots of opportunity for upswings in the economy.

• 401ks have a contribution limit. For 2009, this is $16,500. This amount usually increases by about $500 every year.

• If your employer matches IRA contributions, best advice is to contribute as much as you reasonably can! I’ve noticed in the recent year, many employers have ceased matching IRA contributions. This used to be a popular “perk”,  but has faded away.

Q. Why not just put my money into a good savings account?

A. Contributions into a 401ks are only taxed once, upon withdraw. Money put into a savings account is taxed twice. Once, via income tax, and then the interest you earn is taxed, since that itself is considered income.

Q. So, I should put all of my unused money into a 401k!

A. Probably not. Save some money in other investments for emergencies.

Q. Why?

A. if you happen to need some extra money, early withdraws(before the age of 59 ½) from a 401k are both taxed AND penalized. (but only taxed if you have an exception**)If you want to take out $100,000, you would first be penalized (10% to 20%), and then taxed on the rest. So, financially speaking, it would probably be better to take out a personal loan, or use a credit card if you are in dire need of money.

**exceptions include outstanding medical emergencies, or other various legal reasons.

Should I refinance my Mortgage?

Refinancing your mortgage could potentially save thousands of dollars in the long run. There are many variables to consider, but the most important thing is how much money you could save. This all depends on your current mortgage rate, the new rate a lender is willing to give you, and the various fees involved (also known as closing costs). In some cases, a lender will work with you to determine the best option. Keep in mind, sometimes the money saved on a refinance is eaten up by the fees involved.

The various fees can add up to as much as 3% of your loan amount. On a $200,000 loan, that is $6,000.

• Some lenders require an appraisal to be performed, which can cost $250-$500 depending on the square footage of your home, and the location.

• Other fees include closing fees, title, recording, processing, origination, application, and the approval process.

• many lenders require that you own 10% equity in your home. Once again, on a $200,000 loan, you must have built up $20,000 so far. At my local credit union, the magic number was only 5%.

Instead of a refinance, consider a Rate Modification.

Some lenders will perform a rate modification, which is lowering your rate without refinancing. Keep in mind, even a small rate decrease can reduce your monthly mortgage payments by a considerable amount.

Why would a lender do this? This is less money for them?

The answer is competition. The lender wishes to keep you,(assuming you are up to date on your mortgage payments) and is willing to give you a better rate without forcing you to jump through hoops. I noticed lenders offering a rate modification back when Congress was passing the Federal Loan Modification Program.