Everything you need to know about the $8,000 tax credit

We continue to run into buyers that do not have a clear idea of the tax credit (you do not have to pay back) and how best it can be applied to their situation. Here are the details from the National Association of Realtors:

What qualifies? Any home that is purchased for $80,000 or more qualifies for the full $8000 amount as long as it closes before 12/1/09. If the house costs less than $80,000, the credit will be 10% of the cost.
Who is eligible? Only first-time homebuyers are eligible. A person is considered a first-time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the 2009 purchase.
How does a tax credit work? Every dollar of a tax credit reduces income taxes by a dollar. Credits are claimed on an individual's income tax return. Thus, a qualified purchaser would figure out all the income items and exemptions and make all the calculations required to figure out his/her total tax due. Then, once the total tax owed has been computed, tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return a person has total tax liability of $9500, an $8000 credit would wipe out all but $1500 of the tax due. ($9,500 - $8000 = $1500).
What happens if the purchaser 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. Thus, if the eligible purchaser's total tax liability was $6000, the IRS would send the purchaser a check for $2000. The refundable amount is the difference between $8000 credit amount and the amount of tax liability. ($8000 - $6000 = $2000).
Is there an income restriction? Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals filing Form 1040 as Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Married couples who file a Joint return may have income of no more than $150,000.
Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit? Not always. The credit phases-out between $75,000 - $95,000 for singles and $150,000 - $170,000 for married filing joint. 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. Thus, the credit will disappear after an individual's income reaches $95,000 (single return) or $170,000 (joint return).
How do I apply for the credit? There is no pre-purchase authorization, application or similar approval process. All eligible purchasers simply claim the credit on their IRS Form 1040 tax return. The credit will be reflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov.
Is there any way to get any cash flow benefits before I file my tax return? Yes, there is. Any first-time homebuyers who believe they are eligible for all or part of the credit can modify their income tax withholding (through their employers) or adjust their quarterly estimated tax payments. Use the IRS Form W-4 (get from employer), increase your deductions so your withholding would decrease and your take-home pay would increase. Those who make estimated tax payments would make similar adjustments. If you lack the downpayment for a purchase now, plan ahead. Use the W-4 form to increase your take home pay so that in a few months you will have the required downpayment (3.5% of sales price for FHA loan)
I haven't even filed my 2008 tax return yet. If I buy in 2009, can I still claim it in my 2008 return? Yes you can! Eligible homebuyers who make their purchase between January 1, 2009 and December 1, 2009 can treat the purchase as if it had occurred on December 31, 2008. Thus, they can claim the credit on their 2008 tax return that is due on April 15, 2009. They actually have three filing options.If they purchase between January 1, 2009 and April 15, 2009, they can claim the $8000 credit on the 2008 return due on April 15. They can extend their 2008 income-tax filing until as late as October 15, 2009. (The IRS grants automatic extensions, but the taxpayer must file for the extension. See www.irs.gov for instructions on how to obtain an extension.) If they have filed their 2008 return before they purchase the home, they may file an amended 2008 tax return on Form 1040X. (Form 1040X is available at www.irs.gov). Of course, 2009 purchasers will always have the option of claiming the credit for the 2009 purchase on their 2009 return. Their 2009 tax return is due on April 15, 2010.
Will I ever have to repay any of the credit back to the government? One situation does require a recapture payment back to the government. If you claim the credit but then sell the property within 3 years of the date of purchase, you are required to pay back the full amount of any credit, including any refund you received from it. A few exceptions apply. Some exceptions apply: If the homeowner who used the credit dies within the first three years of ownership, there is no recapture. Special rules make adjustments for people who sell homes as part of a divorce settlement, as well. Similarly, adjustments are made in the case of a home that is part of an involuntary conversion (property is destroyed in a natural disaster or subject to condemnation by eminent domain by an authorized agency) within the first three years.