First Time Home Buyer Tax Credit
There has been a lot of buzz among our clients about the tax credit for buying a home. Let's highlight a few points, and then we will elaborate further what they mean.
- Tax credit of 10% of home purchase price
- Tax credit, not tax deduction
- Fully refundable
10% of Purchase Price
Like it sounds, the tax credit is available for 10% of the home's purchase price. There is a limit, though. The purpose of the stimulus is to help people into their first home. For that reason, there is a maximum credit of $8000. So for the first $80,000, you will get the entire 10% back when you file your taxes. For purchases above $80,000 you will still receive $8000.
Tax Credit
There is a difference between a tax credit and a tax deduction. A tax credit offsets your tax liabilities on a dollar for dollar basis. A tax deduction offsets your income on a dollar for dollar basis.
Let's assume that you make $50,000 per year, and a flat tax rate of 20% across the board (this is for simplifcation purposes). Your tax liability may be $10,000. An $8000 tax credit will reduce your tax liability to $2000. An $8000 tax deduction will reduce your taxable income to $42,000, and then your tax liability will be $8400. See the difference? The tax credit made you $6400 in this example.
Fully Refundable
Here is where it gets exciting. Normally tax credits are carried forward until you use them all up. For this year, these tax credits will be fully refundable. If you did your tax withholdings perfectly, then you will owe $0 on April 15. Of course nobody does this, but let's assume that is the case. If you buy a home this year, then you will get a check for $8000 from the US government. You can cash that check and never have to pay it back. Best of all, you get it immediately! You don't have to wait until you file your 2009 taxes.
Disclaimer: We are real estate professionals, not tax professionals. Please consult with your tax professional.
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