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$8,000 Credit Explained

$8,000 Credit Explained

There are a lot of questions around the $8,000 tax credit that is part of Obama’s stimulus package. Here’s a more detailed explanation:

The $787 Billion stimulus bill is made up of tax cuts and spending programs aimed at reviving the US economy. Although the package was scaled down from nearly $1 Trillion, it still stands as the largest anti-recession effort since World War II. One of the major benefits of the plan is a tax credit for new homebuyers.

According to the plan, first-time homebuyers who purchase homes from the start of the year until the end of November 2009 may be eligible for the lower of an $8,000 or 10% of the value of the home tax credit.

A first-time home buyer is defined as someone who has not owned a primary residence for the last three years.

It’s important to remember that the $8,000 tax credit is just that… a tax credit. It’s a dollar-for-dollar tax reduction, rather than a reduction in a tax liability that would only save you $1,000 to $1,500 when all was said and done. So, if you were to owe $8,000 in income taxes and would qualify for the $8,000 tax credit, you would owe nothing.

Better still, the incentive is refundable, which means you can receive a check for the credit even if you have little income tax liability. For example, if you’re liable for $4,000 in income tax, you can offset that $4,000 with half of the tax incentive… and still receive a check for the remaining $4,000!

Who Qualifies?

The $8,000 incentive starts phasing out for couples with incomes above $150,000 and single filers with incomes above $75,000 and is phased out completely at incomes of $170,000 for couples and $95,000 for single filers.

To break down what this phase-out means, 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 phase-out threshold 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 incentive 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 to reduce the tax liability by $2,800.

Remember, these are general examples. Borrows should consult a tax advisor to provide guidance relevant to their specific circumstances.

What Type of Home Qualifies?

The tax credit is applicable to any home that will be used as a principle residence. Based on that guideline, qualifying “homes” include single-family detached homes, as well as attached homes such as townhouses and condominiums. In addition, manufactured homes and houseboats used for principle residence also qualify. Buyers will have to repay the credit if they sell their homes within three years.

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Posted on March 9th, 2009
Posted by: Irina Netchaev

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