It's a great idea... stimulating the economy from the ground up by giving would-be homebuyers an $8,000 push. But since the purchase must complete before the credit can be obtained, for those who don't have the down payment up front, the First Time Homebuyer Credit works better in theory than in practice.
Here's a reminder of the rules for using the First Time Homebuyer Credit:
- The credit is available to first time homebuyers, defined as an individual who has not owned a home in the three year period prior to the purchase.
- Eligible buyers must buy a principal residence – new or resale - on or after January 1, 2009 and before December 1, 2009.
- The purchase date is defined as the date of closing and property title transfer.
- The tax credit is equal to 10 percent of the home's purchase price, up to a maximum of $8,000.
- Income limits apply in order to get the full credit available: for single taxpayers, $75,000 and for married taxpayers, $150,000. Above those limits, there is still some credit available, depending on the buyer's modified adjusted gross income.
- The tax credit is claimed by filing a Form 5405 with the taxpayer's 2009 tax return or by amending the 2008 return.
- Because it is a refundable credit, it can be claimed even if the taxpayer had no tax liability.
This sounds good, but what about your clients who need the $8,000 for the down payment? Or clients who just need a little help to understand the process?
Here are some ways that CPAs can play a role in securing the credit.
Generally the credit will be applied to the taxpayer's 2009 tax return. But alternatively it can be applied to the 2008 return if the modified adjusted gross income for 2008 does not exceed the income limits. For those who have filed already, CPAs can prepare amended returns once the purchase is complete, accelerating the receipt of the credit.
Taxpayers can also increase their cash up front by adjusting their federal income tax withholding. They would benefit by having an accountant calculate for them how much additional cash they will have to use for the down payment. Plus, accountants can advise them of the potential danger of eliminating their federal tax withholding. If the home purchase does not go through or is deemed ineligible for the credit, the taxpayer could end up owing federal taxes and possibly penalties.
For taxpayers who are at or over the income limits but who still qualify for a partial credit, they may turn to their trusted accountants to figure what the credit will be.
Finally, many states are coming up with their own programs to turn the after-purchase credit into cash available for the down-payment. CPAs who live in states that have these programs can familiarize themselves with the forms and requirements so they can guide homebuyers through the process and help them to get the maximum cash assistance in the fastest possible way.
Does your client list include real estate agents who could benefit from your knowledge of tax credits?
Suppose your client is not the homebuyer, but the real estate agent. CPAs can help real estate agents navigate the First Time Homebuyer Credit in several ways.
They can provide an easy-to-understand statement of the rules that real estate agents can walk through with buyers.
Along with this statement, the accountant can supply real estate agents with a list of suggestions that will help taxpayers get their hands on cash upfront or as soon as possible after the purchase.
- Realtors can advise would-be buyers how to adjust their federal payroll tax withholding and the possible pitfalls of doing so.
- Realtors can advise their client of the possibility of amending the 2008 tax return to get the cash earlier, and if the would-be buyer qualifies and agrees, the CPA can prepare the amended return.
- Agents can identify state programs that may be available to the taxpayer to get the cash in advance for use in making a down payment, and offer assistance in applying for the programs. Several states already have in place programs that will make this credit more effective by allowing home buyers to get a cash advance that can be used for the down payment.
In addition, CPAs can provide their real estate agent/clients with dollar figure examples for those with income above the upper limits but who still qualify for partial credits. Here are some examples posted by Federalhousingcredit.com.
Assume that a married couple has a modified adjusted gross income of $160,000. The applicable phase-out to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phase-out range of $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 home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.
Or, assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer's income exceeds $75,000 by $13,000. Dividing $13,000 by the phaseout 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.