Most tax breaks for homeowners go out the window if you don’t itemize your deductions on a Schedule A. And 63% of Americans don’t itemize deductions. The tax benefits of home ownership accrue primarily to the affluent, who are more likely to have mortgage interest and other expenses that exceed the standard deduction of $5,450 for singles, $10,900 for married couples, and $8,000 for heads of households (many single parents).
So those with less income (who are also more likely to have credit issues and pay higher interest rates for everything they buy) also get less financial benefit from homeownership. However, the new housing reform law does throw those who don’t itemize a bone starting in 2008. Even taxpayers who don’t itemize deductions will be able to deduct property taxes from their income (up to $1000 for married folks and $500 for other filers). Add this incentive to the $7500 first time homebuyer tax credit and you get some real reasons to buy this year if you can swing it.
For lower income buyers, the fact that the $7500 is a refundable credit is important. In fact, the credit is not available for single taxpayers whose AGI is greater than $95,000 and married couples with an AGI exceeding $170,000. But if you qualify, even if you pay little or no tax you get the benefit of this credit. For example, Joe Taxpayer has $2,500 withheld from his paycheck during 2008. His tax liability for the year is $3,000. Normally, Joe would have to write the IRS a check for $500 when filing his taxes. However, in 2008 Joe became a first time home buyer. So he gets a $7,500 tax credit. Instead of writing a check for $500, Joe gets a check from the IRS for $7,000 (the $7,500 credit minus the $500 he would have owed). Pretty sweet.
There is a small catch. The credit does get paid back to the IRS over time ($500 a year over 15 years). Or if the home is sold, then the remaining credit would be due from the profit of the home sale. If there isn’t enough profit from the home sale, though, the credit is written off and you don’t have to repay the IRS. So if you buy a house, live in it for a couple of years and sell it, even if you don’t make money on the deal you’re still $6,500 ahead (the $7500 credit less the $1,000 repaid by you).
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“The credit does get paid back to the IRS over time ($500 a year over 15 years).”
Can you explain this? Are you talking about the property tax? Sorry, it’s Monday.
Alan, thanks for the question. When referring to the $7,500, we are talking about Federal income tax, not property tax. So what happens is the first year you get $7500 from the Feds. The following year (and every year for the next 15 or until you sell the house)you’d repay $500 of it. So, if you’d normally pay $2500 in taxes, the next year you’d pay $3,000. What it amounts to is a long-term, interest-free loan from the government. Which doesn’t sound like anything great until you look at the numbers.
You get a sizable chunk of money now, which you could use to pay off high interest credit card debt, invest, or offset the costs of buying your home. In fact, you could invest the $7500 and if you get a 6.67% return that’s $500, which takes care of your payment and you still have the $7500. Or if you used it to pay off credit cards with an 18% rate, you’d be saving about $1,350 in interest and only have to pay back $500. IT’S **FREE MONEY**
The $500 to $1,000 income tax deduction (which you get every year and don’t have to repay) IS a reduction of your taxable income based on your PROPERTY TAX payments. Hope that was clearer, Happy Monday!