Your Tax Return Is the Key to Your Home-Buyer Tax Credit

The recent stimulus plan that was enacted can help home buyers, but it’s limited to certain situations.  If you are a first time home buyer, or if you have not owned a home in the past three years you could qualify for this credit. The credit cannot be used at closing, however.  This credit is something you would receive at tax time.

As a credit, you receive the money the as a tax refund. The good part is this is a refundable credit, which means that even if you do not owe much in taxes, the government will give you the money.  If you purchase your home in the next month it can be claimed on your 2008 taxes.

There are some caveats: You will receive less than $8,000 if the house you buy costs less than $80,000, or if you owe the government taxes that were not claimed.  The $8,000 is the maximum. If the house you buy costs less than $80,000, you will receive 10 percent of the purchase price.

Better Than Last Year’s Tax Credit

The $8,000 credit that just went into effect is a much better deal than the one aimed at luring home buyers last year. In 2008, first-time home buyers could receive a $7,500 tax credit, but important strings were attached: The home buyer has to repay the sum to the government over 15 years. In contrast, home buyers this year can receive $8,000 without any obligation to repay the money, provided they live in the home for three years.And if people buy a home soon, they can capture the new $8,000 credit quickly, on their tax return for 2008.

You Can Amend Your Return

Even if you filed your 2008 tax return already, a first-time buyer can still claim the credit on a home purchased early this year.  You could file an amended return with Form 1040X. If you plan to buy a home later this year, you can request an extension of your 2008 taxes and claim the credit as you complete your tax return by Oct. 15. The other option is to claim the credit on your 2009 tax return.

As a rule of thumb, people should not buy homes if the monthly payments will consume more than 28 percent of their income and if they are carrying balances on their credit cards from month to month.

Before buying, run through your income and expenses to make sure a house is affordable now and will continue to be if you face harder times. For a new homeowner, keep in mind that you must calculate mortgage payments; condo fees, if applicable; property taxes; homeowner’s insurance; utilities; and maintenance. As a rule of thumb, it’s wise to put aside $150 a month for repairs in case you must call in the plumber or face some other unbudgeted expense.