| 1. $8,000 First-Time Home Buyer Tax Credit | | | | but it does! Even if the seller pays points for you, you |
| Nearly everyone has heard about the $8,000 tax | | | | still get to deduct them. You'll get a lower interest rate, |
| credit. If you can get this government money you | | | | a lower payment, and higher tax deduction. |
| should! You will want to ensure you qualify so you're | | | | 3. Writing Off Your Mortgage Interest |
| not disappointed. | | | | All the mortgage interest you pay on your loan, up to |
| Who is Eligible for the Tax Credit? | | | | $1,000,000, is tax deductible. This is different than the |
| Can you claim the tax credit? | | | | tax credit because you do not get to deduct the full |
| First-time home buyers purchasing any kind of home - | | | | amount from your taxes, but rather from the income |
| new or resale - are eligible for the tax credit. | | | | on which you pay taxes. |
| What is the definition of a first-time home buyer? | | | | The following are two ways in which you can |
| The law defines "first-time home buyer" as a buyer | | | | effectively write off your mortgage interest. One will |
| who has not owned a principal residence during the | | | | save you money monthly and the other acts as a |
| three-year period prior to the purchase. For married | | | | yearly savings account with the government. |
| taxpayers, the law tests the home ownership history | | | | Saving Every Month by Adjusting Your W-4 (For W-2 |
| of both the home buyer and his/her spouse. | | | | Paid Employees) |
| How Does it Work? | | | | The deductible interest you pay on your mortgage can |
| How is the amount of the tax credit determined? | | | | be "cashed-in" on a monthly basis. In fact it can raise |
| The tax credit is equal to 10 percent of the home's | | | | every pay-check you get over the course of the year. |
| purchase price up to a maximum of $8,000. | | | | Your W-4 is also called an Employee's Withholding |
| Is a tax credit the same as a tax deduction? | | | | Allowance Certificate. It allows you to determine how |
| No. A tax credit is a dollar-for-dollar reduction in what | | | | much money you want your company to withhold |
| the taxpayer owes. That means that a taxpayer who | | | | from your paycheck to pay your taxes at the end of |
| owes $8,000 in income taxes and who receives an | | | | the year. In order to raise the amount of your |
| $8,000 tax credit would owe nothing to the IRS. A tax | | | | paycheck, you simply raise the number of "allowances" |
| deduction is subtracted from the amount of income | | | | you are claiming. A higher number of allowances |
| that is taxed. Using the same example, assume the | | | | means less tax withholdings, thus giving you a bigger |
| taxpayer is in the 15 percent tax bracket and owes | | | | paycheck. You may use this strategy to increase cash |
| $8,000 in income taxes. If the taxpayer receives an | | | | flow for investing or paying bills. Many people also use |
| $8,000 deduction, the taxpayer's tax liability would be | | | | it because they don't want to give the government |
| reduced by $1,200 (15 percent of $8,000), or lowered | | | | their money in the form of a tax free loan. Your |
| from $8,000 to $6,800. | | | | employer should be able to provide you with a W-4. |
| Are there any income limits for claiming the tax credit? | | | | Saving Every Year with a Government "Savings |
| Yes. The income limit for single taxpayers is $75,000; | | | | Account" |
| for married taxpayers filing a joint return, the limit is | | | | If you prefer to have a large tax refund every year, |
| $150,000. The tax credit amount is reduced for buyers | | | | then buying a house is still for you. Instead of claiming |
| with a modified adjusted gross income (MAGI) of | | | | more allowances, you can simply leave your W-4 |
| more than $75,000 for single taxpayers and $150,000 | | | | alone. You will still get the same amount of deductions |
| for married taxpayers filing a joint return. The | | | | from your taxes. In this scenario, instead of getting |
| phase-out range for the tax credit program is equal to | | | | your money in every paycheck, you will get your |
| $20,000. That means the tax credit amount is reduced | | | | money next year with a larger refund. |
| to zero for taxpayers with MAGI of more than | | | | Ultimately, the choice is yours! Some people like to get |
| $95,000 (single) or $170,000 (married) and is reduced | | | | their money on a monthly basis and some people like |
| proportionally for taxpayers with MAGI's between | | | | to know they have a sizable chunk of cash coming at |
| these amounts. | | | | tax time the following year. |
| How do you claim the tax credit? Do you need to | | | | 4. Writing Off Your State and Local Property Taxes |
| complete a form or application? | | | | As long as we're talking about writing off your |
| Participating in the tax credit program is easy. You | | | | mortgage interest, we should also discuss writing off |
| claim the tax credit on your federal income tax return. | | | | your state and local property taxes. These taxes are |
| Specifically, home buyers should complete IRS Form | | | | deducted the same way as mortgage interest and |
| 5405 to determine their tax credit amount, and then | | | | you can get the money by adjusting your W-4 or |
| claim this amount on line 67 of the 1040 income tax | | | | waiting until the end of the year. |
| form for 2009 returns (line 69 of the 1040 income tax | | | | 5. Selling without Paying Capital Gains or Income Tax |
| form for 2008 returns). No other applications or forms | | | | Even when you sell your house, the government will |
| are required, and no pre-approval is necessary. | | | | keep giving you tax breaks! In fact, married couples |
| However, you will want to make sure that you qualify | | | | can earn up to $500,000 in tax-free income when they |
| for the credit under the income limits and first-time | | | | sell their home. |
| home buyer tests. Note that you cannot claim the | | | | As part of the 1997 Tax Act, single homeowners can |
| credit on Form 5405 for an intended purchase for | | | | realize a profit of $250,000 without paying taxes when |
| some future date; it must be a completed purchase. | | | | they sell their house. The key to saving thousands of |
| What types of homes will qualify for the tax credit? | | | | dollars on taxes is to understand the 2 out of 5 rule. |
| Any home that will be used as a principal residence will | | | | What is the 2 out of 5 rule? |
| qualify for the credit. This includes single-family | | | | Sellers must have not only owned, but also occupied |
| detached homes, attached homes such as | | | | the house as a principal residence during ANY 2 of the |
| townhouses and condominiums, manufactured homes | | | | last 5 years. That's right...ANY 2. This means you can |
| (also known as mobile homes) and houseboats. The | | | | live in your home for 2 years, then rent it for almost 3 |
| definition of principal residence is identical to the one | | | | full years before you must sell to qualify for this tax |
| used to determine whether you may qualify for the | | | | savings. |
| $250,000 / $500,000 capital gains tax exclusion for | | | | How can you benefit from it? |
| principal residences. It is important to note that you | | | | On top of the tax free income you'll receive, the |
| cannot purchase a home from your ancestors | | | | money can be spent anyway you want. |
| (parents, grandparents, etc.), your lineal descendants | | | | A huge misconception is that you must actually "roll" |
| (children, grandchildren, etc.) or your spouse. Please | | | | the proceeds in to a new home in order to keep the |
| consult with your tax advisor for more information. | | | | tax deductions. In reality, the money is yours, tax free, |
| Also see IRS Form 5405. | | | | to buy a home, invest, pay bills, or spend! |
| 2. Paying Points | | | | To Sum It Up: |
| A point is 1% of the loan amount and, when properly | | | | As you can see, people buy houses for many |
| spent, can make a huge difference in your monthly | | | | reasons... |
| payment. | | | | To raise a family or settle down, as an investment or |
| Buyer Pays Own Points on Purchase | | | | a second home, to remodel or flip, or maybe it's just to |
| If you buy a home this year, the points you pay are | | | | paint the walls ANY color they want! It seems like |
| tax deductible. Points are typically paid to lower your | | | | there are as many reasons to buy a house as there |
| interest rate on your loan. They can be considered a | | | | are people. |
| form of upfront interest which is why they are tax | | | | Saving money on your federal taxes is just another |
| deductible. | | | | reason for you to consider home ownership. You can |
| Seller Pays Own Points on Purchase | | | | literally save thousands of dollars per year (or |
| If the seller pays points for you as a seller paid closing | | | | hundreds every month) by using the 5 tax strategies |
| cost you wouldn't think that would benefit your taxes... | | | | outlined above! |