The Expanded National and Refundable Tax Credit for First-Time Homebuyers and Long-Time Residents

During 2009, Congress updated and expanded the First-Time Homebuyer credit two times.  The tax law that applies to your home purchase is based on when you purchased your home.  During all three “phases” of the credit, a first-time homebuyer is defined as a taxpayer who hasn’t owned a principal residence within the last three years prior to the new home purchase.  The definition of a principal residence can become complicated when living in the expatriate lifestyle.  If you need more clarity on whether your current property qualifies as a principal residence for the purposes of this tax credit, please contact us directly.

Home Purchases Between April 9, 2008 and December 31, 2008

The First-Time Homebuyer credit in place during this period  is similar to an interest free loan.  The “credit” is limited to 10% of the home’s purchase price up to a maximum credit of $7,500.  Taxpayers claim the credit on the tax return in the year of the home purchase.  The credit is repaid in 15 equal installments on the taxpayer’s return beginning two years after the home purchase.   If the home ceases to be your principal residence during the 15-year payback period, then many taxpayers must recapture the remaining credit on their tax return in the year the residence changes status.  There are new exceptions to this rule in place for Military, Foreign Service and other US Government agencies. Read on for a description of the new exceptions.

There are restrictions as to which taxpayers qualify.  For example, taxpayers cannot purchase the home from a close relative and they must meet modified adjusted gross income restrictions.

Home Purchases Between January 1, 2009 and June 30, 2010

The First-Time Homebuyer Credit in place during this period is no longer an interest-free loan, but instead a refundable tax credit for qualified taxpayers.  The credit is limited to 10% of the home’s purchase price up to a maximum credit of $8,000 for married filing jointly taxpayers.

When Congress changed the First-Time Homebuyer credit, it also expanded the credit to include Long-Term Residents.  A Long-Term Resident is defined as a taxpayer who has owned the same home for any 5-consecutive-year period during the 8-year period ending on the date of the purchase of a subsequent principal residence.  The Long-Term Resident credit is a refundable credit for up to 10% of home purchase price up to a maximum credit of $6,500 for married filing jointly taxpayers.

For both the new First-Time Homebuyer Credit and the Long-Term Resident Credit, the taxpayer must have a binding contract to purchase before May 1, 2010 and must close on the sale before July 1, 2010, unless the taxpayer qualifies under the new Military and Foreign Service exceptions (see below).  The taxpayer does not pay back the credit unless the taxpayer disposes of the residence or it ceases to be his/her principal residence during the 36-month period beginning on the date of the purchase (see Military and Foreign Service exceptions below).  There are other restrictions that may also apply.  For example, the purchase price of the new property cannot exceed $800,000; taxpayers cannot purchase the home from a close relative; and they must meet modified adjusted gross income restrictions.

New Exceptions for Military, Foreign Service and Other Qualifying Government Agencies

Members of the Military and qualifying Foreign Service and Intelligence Community members serving outside the US now have an extra year to buy a principal residence in the US and qualify for the credit.  An eligible taxpayer must enter into a binding contract to buy a principal residence on or before April 30, 2011 and must close on or before June 30, 2011.  An eligible taxpayer must serve on qualified official extended duty service outside the US for at least 90 days during the period beginning after 12/31/2008 and ending before May 1, 2010.  The credit repayment/recapture rules are waived for eligible taxpayers if the home is sold or stops being the taxpayer’s principal residence after 12/31/2008 due to government orders received by the taxpayer (or spouse) for qualified official extended duty service.

For more information on whether you might qualify this credit, please contact us directly at christine@cemtaxplanning.com.

Additional Standard Deduction for State and Local Real Property Taxes Paid in 2009

This new deduction helps taxpayers who pay real estate taxes on a property used as a home (not as a rental property), but do not itemized their deductions on Schedule A.   Taxpayers can claim an additional standard deduction up to the lesser of the real estate taxes paid or $500 for single filers and $1,000 for marreid filing jointly filers.  The real estate taxes paid must meet the same requirements as those qualifying for the itemized deduction on Schedule A and they can include qualifying foreign real estate taxes.  But remember, if you own your home but you have it rented while you are stationed overseas, the real estate taxes you pay on your home are included on your Schedule E, not your Schedule A and thus will probably not qualify for this deduction.

For more information on whether you might qualify this deduction, please contact us directly at christine@cemtaxplanning.com.

The Making Work Pay Credit

This new credit applies only to tax years 2009 and 2010.  It is calculated as the lesser of 6.2% of an individual’s earned income or $800 for married filing jointly ($400 for single filers).  There are income restrictions that apply.

For more information on whether you might qualify this new credit, please contact us directly at christine@cemtaxplanning.com.

Expanded Qualified Expense Definition for Qualified Tuition Programs

You can now purchase computer technology, equipment, Internet access or related services (excluding computer software for sports, games or hobbies) from your Qualified Tuition Program funds such as a 529 savings plan.  Previously, eligible expenses to receive tax-free withdrawals only included tuition, fees, books, supplies, equipment required for enrollment or attendance, expenses for special needs services and room and board costs (subject to limitations) for at least half-time students.  This change in definition applies only to tax years 2009 and 2010.

New American Opportunity Tax Credit

This new tax credit for tax years 2009 and 2010 modifies the HOPE tax credit rules.  The New American Opportunity Tax Credit allows up to a $2,500 credit (100% of 1^st $2,000 expenses and 25% of next $2,000) per eligible student per year for qualified tuition and related expenses paid for each of the first 4 years of the student’s post-secondary education in a degree or certificate program.  The tuition and related expenses definition was also expanded to include course materials (previously tuition and academic fees only).  The credit is 40% refundable for non-child taxpayers (0% refundable to child taxpayers subject to kiddie tax), but there are modified adjusted gross income limits in place to qualify.

For more information on whether you might qualify this new credit, please contact us directly at christine@cemtaxplanning.com.

http://seattletimes.nwsource.com/html/businesstechnology/2008543893_fundshock21.html

New National and Refundable Tax Credit for First-Time Homebuyers

This new tax credit is similar to an interest free loan to help first-time homebuyers accumulate enough funds for a downpayment.  A first-time homebuyer is defined as a taxpayer who hasn’t owned a main home within the last three years prior to the new home purchase. The “credit” is limited to 10% of the home’s purchase price up to a maximum credit of $7,500.  Taxpayers claim the credit on the tax return in the year of the home purchase.  The credit is repaid in 15 equal installments on the taxpayer’s return beginning two years after the home purchase.   But please note, the credit applies only to homes purchased between April 9, 2008 and July 1, 2009.

There are restrictions as to which taxpayers qualify.  In addition to meeting Congress’ definition of a first-time homebuyer, taxpayers cannot purchase the home from a close relative and they must meet modified adjusted gross income restrictions.

For more information on whether you might qualify this new credit, please contact us directly at christine@cemtaxplanning.com.

Additional Standard Deduction for State and Local Real Property Taxes Paid in 2008

This new deduction helps taxpayers who pay real estate taxes on a property used as a home (not as a rental property), but do not itemized their deductions on Schedule A.   Taxpayers can claim an additional standard deduction up to the lesser of the real estate taxes paid or $500 for single filers and $1,000 for marreid filing jointly filers.  The real estate taxes paid must meet the same requirements as those qualifying for the itemized deduction on Schedule A and they can include qualifying foreign real estate taxes.  But remember, if you own your home but you have it rented while you are stationed overseas, the real estate taxes you pay on your home are included on your Schedule E, not your Schedule A and thus will probably not qualify for this deduction.

For more information on whether you might qualify this new deduction, please contact us directly at christine@cemtaxplanning.com.

Peace Corp Now Included on 10-Year Suspension Rule for Section 121 Gain Exclusion

Beginning in 2008, Peace Corp employees and volunteers are now included on the 10-year suspension rule for Section 121 gain exclusion that was previously only enjoyed by US Military, Foreign Service and the Intelligence Community.

In a nutshell, the Section 121 gain exclusion allows taxpayers to exclude capital gains up to $250,000 as a single filer and $500,000 as a married filing jointly couple from capital gain taxes.  To qualify for the exclusion, the taxpayer must live in the property as a main home for at least 2 of the last 5 years or meet the IRS-defined unforeseen circumstances rules for a partial exclusion.

The 10-year suspension rule allows for qualifying taxpayers to suspend the 5-year requirement while they are not living in the home due to an official US government assignment elsewhere with a qualifying government agency.

But remember:  Section 121 gain exclusion applies only to capital gains (the difference between your basis in the property and the sales price).  If you own a property and you have it rented while living elsewhere or overseas, you are required to depreciate the property on your Schedule E.  When you sell the property, the depreciation that you took or could have taken is called Section 1250 unrecaptured gain and this amount MUST be recorded on your tax return in the year of sale up to the amount of gain on the property.  Even if you never properly depreciated your property, you still must record the amount of depreciation you could have taken as Section 1250 unrecaptured gain on your tax return in the year of sale.  Section 1250 unrecaptured gain can never be excluded…only your capital gain can potentially be excluded under the Section 121 rules.

For more information on whether you might qualify this suspension rule, please contact us directly at christine@cemtaxplanning.com.

New Limitations on the Section 121 Gain Exclusion Rules

In order to pay for the new tax cuts Congress approved in 2008, Congress also approved some new tax increases.  The main increase that affects your individual return is the new limitation rule on Section 121 gain exclusion.  Prior to the rule change, taxpayers could exclude capital gain up to the Section 121 limits as long as the property was used as the taxpayer’s principal residence for at least 2 of the last 5 years.  If the property was rented as well during the 5 year period, the rental period did not count against the taxpayer for capital gain exclusion as long as the taxpayer had met the 2 year rule.

Congress changed the Section 121 gain exclusion rules in 2008.  Now, the capital gain attributed to the period the taxpayer had rented the property prior to sale can no longer be excluded for periods beginning on and after January 1, 2009.  However, similar to the 10-year suspension rules discussed previously, taxpayers who rented their property while on official orders from a qualifying government agency (US Military, Foreign Service, and Intelligence Community) are excluded from this tax law change.

For more information on how this change to the Section 121 gain exclusion rules could impact you, please contact us directly at christine@cemtaxplanning.com.