This week, the blog will share pointers on how homeowners can improve their chances of getting a refund -- or owing less -- when they file their 2008 federal income tax forms this year.
The expense: Buying a new home
The credit: For consumers who purchased their very first home last year, there is a new credit available for 2008. As part of the Housing Assistance Tax Act of 2008, the government will allow a credit of as much as $7,500 (or 10 percent of your purchase price, whichever is less) for your federal income taxes. (The credit can be claimed on IRS Form 5405, which should be attached to your Form 1040.)
The good news is that the credit is fully refundable -- meaning that the credit will be paid out to eligible taxpayers if they owe no tax, or will be applied to reduce the tax liabilities if they owe tax, according to the IRS. (Note: anybody who has not owned a main home in the past three years is defined as a first-time homebuyer for this credit.)
The drawbacks are that it only covers homes purchased after April 8, 2008, and the credit is more like an interest-free loan than a freebie from the government. "The bad news is that the credit is repayable," says Jackie Perlman, a tax analyst with the Tax Institute at H&R Block. "You have to start repaying it in 2010, and it is repaid in 15 equal installments. So, it's not for everybody. The point is you get some cash in your hand to help with your financing."
A plus is that there's no stipulation on how you spend the money you get -- you can pay down your home expenses or even buy a large-screen TV, she adds.
However, those who buy their homes after Dec. 31, 2008 and before Dec. 1, 2009 will get an even better credit for next year's taxes, thanks to the American Recovery and Reinvestment Act of 2009, signed by President Barack Obama on Feb. 17. Under the new law, first-time homebuyers can get a refundable tax credit of up to $8,000, and the credit doesn't have to be repaid unless the home is sold or ceases to be used as a principal residence within three years of purchase. Taxpayers who purchased their home after Jan. 1, 2009 and before Dec. 1, 2009 have the option of claiming the credit on their original (or amended) 2008 tax return.
More information: Check out the National Association of Home Builders for a very helpful guide on both the 2008 and 2009 credits. Both credits may be limited for higher-income taxpayers; those income limits are posted on NAHB's site. The Internal Revenue Service has extensive information on the 2008 credit.
Click here to read the next tax tip: Tips for homeowners -- mortgage.—Lauren Baier Kim