Article from Ventura County Star - 22 February, 2009
By Michelle Singletarymailto:Singletarysingletarym@washpost.com
Sunday, February 22, 2009
The stimulus plan that President Barack Obama has signed into law contains a few tax treats for individuals. But before you jump for joy, please pay close attention to the details so you know exactly which provisions can benefit you, and how.
One of the biggest breaks being trumpeted is a new $8,000 first-time homebuyer tax credit. I say “new” because some believe it completely replaces the $7,500 tax credit passed as part of last year’s Housing and Economic Recovery Act.
It does not.
There are two breaks for first-time homeowners in the tax code now. Which credit you can take depends on when you purchased your home.
If you’re a first-time homebuyer and you purchased your home on or after April 8, 2008, and by Dec. 31, 2008, you do not qualify for the $8,000 first-time homebuyer’s credit recently signed into law by Obama.
You can still take the $7,500 tax credit, but you have to pay that back because it’s not really a credit. It’s a 15-year, interest-free loan from the IRS.
The $8,000 tax credit is available for qualifying home purchases made from Jan. 1, 2009, until Dec. 1, 2009. Did you notice I wrote Dec. 1?
That’s how it’s worded in the law.
I know there will be people who will read Dec. 1 as the end of the year, Dec. 31 — and those who make that mistake may be in for a nasty surprise. You naturally would think the cutoff would be the end of the year. After committing to spend $787 billion dollars, it’s idiotic that homebuyers weren’t given the extra month to qualify for this credit.
At least the $8,000 is a true credit, that is, if you don’t plan on moving within three years. A tax credit is much more valuable than a deduction. A credit reduces dollar for dollar the amount of tax you owe. A deduction merely reduces the amount of your income that is taxable.
If you take advantage of the $8,000 tax credit and then sell your home or it no longer remains your principal residence within 36 months of the purchase date, you will have to pay back the full $8,000.
However, as with the $7,500 credit, if you sell and your gain is less than the credit, then you only have to repay up to the amount of the gain. If you die before the credit/loan is repaid, any outstanding amount is forgiven.
I’ve never liked the $7,500 credit because of its lengthy loan feature. Repayment for the $7,500 begins the second tax year after you take the credit. So if you claim the credit on your 2008 tax return, you have to begin paying back the money in 2010.
There’s something else to take into account. If your status is married filing separately, you can’t get the full $8,000 credit or $7,500 credit.
Instead, you get $4,000 of the $8,000 credit and $3,750 of the $7,500 credit. People filing as single are eligible for the full credit. Don’t complain to me about the difference in treatment between a single tax filer and married filing separately. It is what it is.
If you are still not sure which first-time homebuyer credit you qualify for, call the IRS. You don’t want to end up owing money on a loan you thought was a credit.
Here are several other tax breaks passed into law:
- For 2008, the child tax credit is refundable if 15 percent of the taxpayer’s earned income is in excess of $8,500. The new law would reduce this floor in 2009 and 2010 to $3,000. “It makes the full benefit of the child tax credit available to a larger number of low- and moderate-income workers,” said Eric Smith, a spokesman for the IRS.
- You get a one-year deduction for state or local sales or excise tax paid on new-car purchases up to $49,500. The deduction does not include interest on the loan, as some media reports have said. Additionally, the deduction is “above the line,” which means that it can be taken even by those who do not itemize other deductions on their tax returns. To qualify, you have to have an annual adjusted gross income below $135,000 for individuals or $260,000 in the case of joint returns.
- Money withdrawn from a 529 college savings plan is not taxable if it’s used for qualifying expenses. Under the stimulus plan, computer expenses will now be considered an allowable expense for 529 college savings plans.
- The plan exempts the first $2,400 of unemployment insurance benefits from federal income taxes in 2009.
One more thing, please note that many of the tax breaks in the stimulus plan apply only for your 2009 tax return — not the current tax filing season.
— Listen to Michelle Singletary discuss personal finance every Tuesday on NPR’s “Day to Day.’’ To hear her reports online, go to http://www.npr.org/.
Readers can write to her c/o The Washington Post, 1150 15th St., N.W., Washington, D.C. 20071. Her e-mail address is singletarym@washpost.com.
