Now that the details from the stimulus package have emerged, I have been getting lots of questions from my clients asking what it all means.

The 2009 version of the tax credit is an improved version of the 2008 tax credit. The 2008 version was supposed to be an incentive to get first time home buyers to purchase a home and thereby decrease the over-supply of homes for sale. The “credit” was for $7500, but the problem was that it had to be paid back. For 2009, Congress increased the tax credit to $8000.00 and made several additional improvements.

Here are the answers to the most common questions:

1. Who is eligible? First time home buyers are eligible which means anyone who has not had any ownership interest in a home in the past three years prior to the 2009 purchase.

2. What is this new tax incentive? The 2009 Tax Credit is for $8000.00 and repayment of the credit is NOT required. (IMPORTANT NOTE: The government IS requiring repayment if the property is sold in the first three years after the purchase.)

3. When is it effective? It is available ONLY for the purchase of a property which is the buyer’s principal residence on or after January 1, 2009 and before December 1, 2009.

4. How does the Tax Credit Work? Credits are claimed on the eligible (see above) individual’s 2009 income tax return. Every dollar of the tax credit reduces actual income taxes by a dollar. The Tax Credit is applied against the person’s tax liability. So if you owe Uncle Sam $9500.00, an $8000.00 tax credit would wipe out all but $1500.00 of the tax due. ($9500 – $8000 = $1500)

5. What happens if the buyer is eligible for an $8000. credit, but their entire income tax liability for the year is only $6000? This tax credit is what’s called “refundable” credit. So if the eligible purchaser’s total tax liability is only $6000., the IRS would send the purchaser a check for $2000. The refundable amount is the difference between the $8000. credit amount and the amount of tax liability. ($8000. – $6000. = $2000.)

6. Is there an income limit in receiving the tax credit? The credit phases-out with incomes between $75,000 – $95,000 for singles and $150,000 – $170,000 for married couples filing joint returns. The closer a buyer comes to the maximum phase-out amount, the smaller the credit will be. The law provides a formula to gradually withdraw the credit. So the credit will disappear after an individual’s income reaches $95,000 for singles and $170,000 for married couples filing joint.

7. Are there restrictions on the location of the property? The home MUST BE LOCATED in the United States.

8. If a buyer purchased in 2008 and used the $7500.tax credit, will they still have to repay their tax credit?

YES!!! The $7500 credit in 2008 was more like an interest-free loan. All eligible purchasers who claimed the 2008 credit will still be required to repay it over 15 years, starting with their 2010 tax return.

I hope this helps you understand this Tax Credit; however, I would caution you to check with your accountant regarding your personal situation.