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You Can Benefit, but Don't Get Caught by Details

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By Michelle Singletary
Sunday, February 22, 2009

The stimulus plan President Obama signed into law contains a few tax treats for individuals. But before you jump for joy, pay close attention to the details so you know which provisions can benefit you, and how.

One of the biggest breaks being trumpeted is a new, $8,000 first-time home buyer tax credit. I say "new" because some people think it replaces the $7,500 tax credit passed as part of last year's Housing and Economic Recovery Act. It does not.

There are now two breaks in the tax code for first-time homeowners. Which credit you can take depends on when you purchased your home.

If you're a first-time home buyer 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.

But you can still take the $7,500 tax credit -- though you have to pay it 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 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 would naturally think the cutoff would be the end of the year. After the government committed to spend $787 billion dollars, it's idiotic that home buyers 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's no longer 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 the home and your gain is less than the credit, 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 or $7,500 credit. Instead, you get $4,000 of the $8,000 credit or $3,750 of the $7,500 credit. Single filers 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're still not sure which first-time home buyer credit you qualify for, call the IRS. You don't want to end up owing money on a loan you thought was a credit.


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