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ARRA First-Time Homebuyer Tax Credits Made Easy

With recent talks of the economy’s recovery, there has never been a better time to purchase a home, and first-time homebuyers are reaping…

With recent talks of the economy’s recovery, there has never been a better time to purchase a home, and first-time homebuyers are reaping the rewards. The American Recovery and Reinvestment Act (ARRA) of 2009 is offering a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence, new or resale, between January 1, 2009, and December 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the homeowner. This tax credit is a dollar-for-dollar reduction in what the taxpayer owes.

A “first-time homebuyer” is defined for this tax credit as an individual who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the homebuyer and the spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualify for the first-time homebuyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, for example, if a parent jointly purchases a home with a son or daughter.

This tax incentive is a true tax credit and will not have to be repaid. However, homebuyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions do apply.

The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The phase-out range for the tax credit program is equal to $20,000, meaning the tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.

To determine your MAGI, you must first determine “adjusted gross income” or AGI. AGI is your total income for a year, minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions or personal exemptions are subtracted. To determine MAGI, add to AGI certain amounts of foreign-earned income.

Partial tax credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phase-out limits. For example, assume that an individual homebuyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds the single taxpayer limit of $75,000 by $13,000. Dividing $13,000 by the phase-out range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.

It’s easy to participate in the tax credit program. You claim the tax credit on your federal income tax return. No other applications or forms are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time homebuyer tests.

Any home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) houseboats and newly-constructed homes. Please note that you cannot purchase a home from your ancestors (parents, grandparents, etc.), lineal descendants (children, grandchildren, etc.) or your spouse. Please consult with your tax advisor for more information.

The Department of Housing and Urban Development (HUD) will allow “monetization” of the tax credit, meaning they will allow buyers using Federal Housing Administration (FHA)-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 income taxes to receive a refund. These funds may be used for certain down payment and closing costs. Approved FHA lenders will also be able to purchase a homebuyer’s anticipated tax credit to pay closing costs and down payment costs above the 3.5 percent down payment that is required for FHA-insured homes.


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