Homeowners Tax Credit Overview

Here is an overview of homeowners tax credits that’s a useful reference tool. Click for full size. The tax credit for first time home buyers was increased from $7500 to $8000 for homes purchased between January 1, 2009 and December 1, 2009. A tax credit is equivalent to money in your hand, whereas a tax deduction just reduces taxable income.

The credit no longer needs to be paid back as long as you live in the home without selling it for 3 years. The tax credit is applicable to any home that will be used as a principal residence, which includes single-family detached homes, townhouses and condominiums, manufactured homes and houseboats.

The $7500 version of the credit expired on July 1, 2009, and required home buyers to pay the funds back over a 15 year time frame. If you bought the home in 2008, the credit remains $7500, and it still needs to be paid back over a 15 year timeframe beginning in 2011 when you file your 2010 returns.

The credit remains refundable. This means that first-time home buyers who owe less than $8000 in taxes for the year are still eligible for the full $8000 credit when they file their tax returns. In that case, the IRS will write you a check for the difference between $8,000 and your actual tax bill. The credit can be claimed on your 2008 tax returns that you file by April 15, 2009, even if you buy the home in 2009.

The credit phases out for couples making over $150k or singles making over $75k. Phaseout examples are below. To break down what this phaseout means to homebuyers who are over those amounts, the National Association of Homebuilders (NAHB) offers the following examples:

Example 1: Assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time homebuyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.

Example 2: Assume that an individual homebuyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $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.

For those tracking the math in the examples above, you may be wondering where the “$20,000” came from—that is, why you divide “$10,000 by $20,000” in the first example and “$13,000 by $20,000” in the second example. Here’s where the $20,000 comes into play:

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 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.

In other words:

$170,000 – $150,000 = the $20,000 in the first example
$95,000 – $75,000 = the $20,000 in the second example

You should always consult your tax adviser for information relating to your specific circumstances.