GOVERNMENT REWARDS NEW HOMEOWNERS WITH $8,000 BOUNTY THROUGH NOVEMBER 30TH

by Andrew D. Schwartz, CPA

The housing market stinks.   And the decreased home values continue to wreak havoc on the credit markets.

In an attempt to buoy the housing market while still in office, President Bush introduced a $7,500 first-time homebuyer credit as part of the Housing Assistance Tax Act of 2008.  This tax credit was to apply to homes purchased between 4/9/08 and 6/30/09, and was equal to the lesser of 10% of the home's purchase price or $7,500. 

The 2008 version of this tax break contained a unique feature, however.  Anyone receiving this tax credit would need to repay the amount of the credit over fifteen years, making it more like an interest-free loan from the government than a true tax credit.  So if you got the full $7,500 first-time homebuyer credit, you would report and pay an extra $500 annually as part of your tax return until you repaid the government in full.

Extended and Improved

President Obama extended and improved the first-time homebuyer credit as part of the American Recovery and Reinvestment Act of 2009.  Here are some of the 2009 changes to this tax break:

• Extended the time for first-time homebuyers to purchase a home and qualify for this tax break from 6/30/09 to 11/30/09.

• Increased the tax break by $500 - from $7,500 for homes purchased between 4/9/08 and 12/31/08 to $8,000 for homes purchased between 1/1/09 and 11/30/09.

• Waived the repayment requirement for homes purchased in 2009 that are owned and used as a principal residence for at least three years

Who Qualifies?

According to the IRS in their informative First-Time Homebuyer Questions and Answers, "Taxpayers who have not owned another principal residence at any time during the three years prior to the date of purchase" qualify for this tax credit.  If you're married, neither you nor your spouse could have been homeowners during that three-year window.

Like pretty much every tax break introduced since 1986, this tax break includes an income limitation excluding high-income and middle-income taxpayers from claiming this credit.  Both versions of this tax break have identical phase-out provisions - single individuals with Adjusted Gross Income (AGI) of $75K - $95K and married couples with AGI of $150K - $170K.  Earn more than $95k if single or $170k if married, and you're out of luck.

Unmarried Homeowners

How does this tax credit work when two unmarried individuals purchase a home together?  If the income for one of the buyer's exceeds the phase-out limit, the answer is simple.  The other buyer whose income falls below the phase-out limitations claims the full tax credit.

Otherwise, the first-time homebuyer credit may be allocated between the taxpayers using any reasonable method.  Check out the IRS' report on the Allocation of First-Time Homebuyer Credit Between Taxpayers Who Are Not Married for examples of how they recommend new homebuyers split this tax break.

Claiming the Credit

Claiming the First-Time Homebuyer tax credit is pretty simple.  Just complete and attach a Form 5405 to either your federal income tax return (Form 1040) or an amended tax return (Form 1040X).  If you purchased your home between 4/9/08 and 12/31/08, your only option is to claim this credit as part of your 2008 tax filings.

Anyone who purchases a home between 1/1/09 and 11/30/09 has a decision to make.  Either amend your 2008 tax return and claim the credit as part of your 2008 tax filings or claim the tax credit in connection with your 2009 Form 1040.

One key factor is whether your AGI falls below the threshold of $75k for single individuals or $150k for married couples in 2008 and/or 2009.   If your income fell below the applicable threshold in 2008, go ahead and amend your 2008 tax return to get back this $8,000 tax credit as soon as possible.  (Don't forget to check the box on the Form 5405 to notify the IRS that your home was purchased during 2009 to avoid being asked to repay the tax credit.)

Otherwise, you might be better off waiting to claim the credit as part of your 2009 tax return.  Keep in mind that there are still steps you can take to minimize your 2009 AGI.  For starters, max out your 401k and 403b contributions at work to reduce your taxable wages.  Bypassing the Roth version of these plans might also make sense, since contributing to the Roth does not reduce your current year's AGI.

If you're self-employed, holding off invoicing your customers until next year and paying whatever bills you can prior to the end of the year will help reduce the income you'll report from your business.  This year is also a good year to purchase equipment, computers, and office furniture, since you can write off the first $250,000 of business equipment purchased during 2009.  Maxing out your self-employed retirement plan - either a SEP, SIMPLE or Solo 401k - will also help reduce your AGI.

Clock is Ticking

Remember, qualified first-time homebuyers only have until November 30th to finalize the purchase of a home and receive up to $8,000 from the government.  Since it takes a few months or more to locate a home, obtain financing, and close on the property, now's the time to check out the open houses in the neighborhoods where you want to live.  It probably also makes sense to get pre-qualified for a mortgage in order to save time once you find your dream home.

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VICTIMS OF IDENTITY THEFT SHOULD ALSO PLACE FRAUD ALERT WITH IRS

As if you don't have enough to worry about these days, identity theft continues to be a growing problem to many individuals.  If you are a potential victim of identity theft, step one is always to place a Fraud Alert with the three credit bureaus at the website sponsored by the three credit agencies - Equifax, TransUnion, Experian,  www.annualcreditreport.com. 

What you may not realize is that potential identity theft victims should also place a Fraud Alert with the IRS.  According to our friends at the IRS:

An identity thief might also use your Social Security number to file a tax return in order to receive a refund. If the thief files the tax return before you do, the IRS will believe you already filed and received your refund if eligible.

If your Social Security Number is stolen, it may be used by another individual to get a job. That person’s employer would report income earned to the IRS using your Social Security number, making it appear that you did not report all of your income on your tax return.

What do I do if I have not been contacted by IRS for a tax issue but believe I am a victim of identity theft?

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost/stolen purse or wallet, questionable credit card activity, credit report, or other activity, you need to provide the IRS with proof of your identity.

You should submit a copy, not the original documents, of your valid Federal or State issued identification, such as a social security card, driver's license, or passport, etc, along with a copy of a police report and/or a completed IRS Identity Theft Affidavit - Form 14039 [yes, the IRS even has a form for Identity Theft].

Please send these documents using one of the following options:

Mailing address:
Internal Revenue Service
P.O. Box 9039
Andover, MA 01810-0939

FAX: Note that this is not a toll-free FAX number
1-978-247-9965

You may also contact the IRS Identity Protection Specialized Unit, toll-free 1-800-908-4490 for guidance.

(Editor's note: My CPA firm prepares about two thousand individual tax returns each year, and this exact scenario impacted one of our clients this past winter who had a fraudulent tax return filed by someone else under their social security number.)

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2008 & 2009 TAX FACTS

• For 2008, the standard deduction for a single individual is $5,450 and for a married couple is $10,900. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2008, the personal exemption is $3,500. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes is $106,800 for 2009, up from $102,000 for 2008.
  
• The standard mileage rate is $.55 per business mile as of January 1, 2009, down from $.585 per mile as of December 31, 2008.
  
• The maximum annual contribution into a 401(k) plan or a 403(b) plan is $16,500 in 2009.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account this year.
• The maximum annual contribution to your IRA is $5,000 for 2008 and 2009.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2009 to make your 2008 IRA contributions. 

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