Reducing Tax Burden for Homebuyers

As if the allure of spring weren't inspiration enough to make hopeful shoppers start searching in earnest, this year potential home buyers has the prospect of a nice tax credit to help with the purchase. You'll need to get to work fast, though, and acquire the house by the end of April if you want take advantage of what is often called the homebuyer tax credit.

The Worker, Homeownership and Business Assistance Act of 2009 are the formal name for the law that is often abbreviated on for sale signs simply as "$8,000 available." That amount is a reference to the maximum federal income tax credit available to first- time home buyers under the law.

The Louisiana Society of Certified Public Accountants helped taxpayers with their personal and corporate tax questions last month during its annual telephone Tax Hotline. During the three-hour public service event most of the questions posed to the 17 volunteer CPAs were related to claiming the New Homebuyer Credit. While the new act brought extra benefits to help the nation's economy recover, it also raised more questions about who qualifies and how to claim it.

There are some nuances that should be noted, and when it comes to income taxes, the details can never be examined too closely. If you're thinking of claiming the tax credit and are accustomed to preparing your own return, this could be the year to consult a tax professional. The definition of "first-time home buyer" under the act means someone who hasn't owned a primary residence in the past three years. For them, the law gives a tax credit of $8,000 for single taxpayers with modified adjusted gross income of $125,000, and married couples with income up to $225,000.

Single taxpayers with income between $125,000 and $145,000 are eligible for a reduced tax credit. The credit phases out for married couples with annual income of $225,000 to $245,000. Anyone with income over those limits doesn't qualify for the home buyer tax credit. To qualify for the tax credit, buyers must enter into a binding contract to buy a principal residence by April 10, and go to closing by June 30, 2010.

Finally, the act also tightened up on documentation needed to claim the tax credit. Taxpayers who want to claim the credit will have to prove they actually bought a house, not difficult considering all the paperwork involved in a home purchase. Taxpayers will also have to file a paper return and include Form 5405 and a copy of the settlement statement used to complete the purchase, the CPA Society said.

For those homeowners who want to claim the tax credit for buying another home, the best way to prove their longtime ownership will be to submit either property tax records, homeowners insurance records or the Form 1098, the Mortgage Interest Statement from their lender for the property they owned during the five-year period claimed.

As with most things tax-related, be prepared to document, document, document. If the IRS suspects fraud, the act gives the agency authority to automatically assess taxes and start collection proceedings. Members of the military have an additional year to buy a home and take advantage of the tax credit. They have until April 30, 2011, to enter a binding contract to buy, and until June 30, 2011, to close the deal.

Of course, the old benefits of owning your home remain. You'll also get to deduct the home mortgage interest on your federal income tax return and reduce your tax burden.