Tuesday, March 3, 2009

Frequently Asked Questions

In 2008, Congress enacted a $7500 tax credit designed to be an incentive for first-time homebuyers to purchase a home. The credit was designed as a mechanism to decrease the over-supply of homes for sale.

For 2009, Congress has increased the credit to $8000 and made several additional improvements. This revised $8000 tax credit applies to purchases on or after January 1, 2009 and before December 1, 2009.

Tax Credits -- The Basics

1. What’s this new homebuyer tax incentive for 2009?

The 2008 $7500, repayable credit is increased to $8000 and the repayment feature is eliminated for 2009 purchasers. Any home that is purchased for $80,000 or more qualifies for the full $8000 amount. If the house costs less than $80,000, the credit will be 10% of the cost. Thus, if an individual purchased a home for $75,000, the credit would be $7500. It is available for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009.

2. 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.

3. 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)

4. So 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) Most taxpayers determine their tax liability by referring to tables that the IRS prepares each year.

5. How does withholding affect my tax credit and my refund?

A few examples are provided at the end of this document. There are several steps in this calculation, but most income tax software programs are equipped to make that determination.

6. 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.

7. How is my “income” determined?

For most individuals, income is defined and calculated in the same manner as their Adjusted Gross Income (AGI) on their 1040 income tax return. AGI includes items like wages, salaries, interest and dividends, pension and retirement earnings, rental income and a host of other elements. AGI is the final number that appears on the bottom line of the front page of an IRS Form 1040.

8. What if I worked abroad for part of the year?

Some individuals have earned income and/or receive housing allowances while working outside the US. Their income will be adjusted to reflect those items to measure Modified Adjusted Gross Income (MAGI). Their eligibility for the credit will be based on their MAGI.

9. 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).

For example, if a married couple had income of $165,000, their credit would be reduced by 75% as shown:

Couple’s income $165,000
Income limit 150,000
Excess income $15,000

The excess income amount ($15,000 in this example) is used to form a fraction. The numerator of the fraction is the excess income amount ($15,000). The denominator is $20,000 (specified by the statute).

In this example, the disallowed portion of the credit is 75% of $8000, or $6000
($15,000/$20,000 = 75% x $8000 = $6000)

Stated another way, only 25% of the credit amount would be allowed.
In this example, the allowable credit would be $2000 (25% x $8000 = $2000)

10. What’s the definition of “principal residence?”
Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50%). It is also defined as “owner-occupied” housing. The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of new or existing dwelling. Even some houseboats or manufactured homes count as principal residences.

11. Are there restrictions on the location of the property?

Yes. The home must be located in the United States. Property located outside the US is not eligible for the credit.

12. Are there restrictions related to the financing for the mortgage on the property?

In 2009, most financing arrangements are acceptable and will not affect eligibility for the credit. Congress eliminated the financing restriction that applied in 2008. (In 2008, purchasers were ineligible for the $7500 credit if the financing was obtained by means of mortgage revenue bonds.) Now, mortgage-revenue bond financing will not disqualify an otherwise-eligible purchaser. (Mortgage revenue bonds are tax-exempt bonds issued by a state housing agency. Proceeds from the bonds must be used for below market loans to qualified buyers.)

13. Do I have to repay the 2009 tax credit?

NO. There is no repayment for 2009 tax credits.

14. Do 2008 purchasers still have to repay their tax credit?

YES. The $7500 credit in 2008 was more like an interest-free loan. All eligible purchasers who claimed the 2008 credit will still be required to repay it over 15 years, starting with their 2010 tax return.

Some Practical Questions

15. 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.

16. So I can’t use the credit amount as part of my downpayment?

No. Congress tried hard to devise a mechanism that would make the funds available for closing costs, but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.

17. So there’s no 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. Individuals subject to income tax withholding would get an IRS Form W-4 from their employer, follow the instructions on the schedules provided and give the completed Form W-4 back to the employer. In many cases their withholding would decrease and their take-home pay would increase. Those who make estimated tax payments would make similar adjustments.

Some “Real World” Examples

18. What if I purchase later this year but can’t get to settlement before December 1?

The credit is available for purchases before December 1, 2009. A home is considered as “purchased” when all events have occurred that transfer the title from the seller to the new purchaser. Thus, closings must occur before December 1, 2009 for purchases to be eligible for the credit.

19. I haven’t even filed my 2008 tax return yet. If I buy in 2009, do I have to wait until next year to get the benefit of the credit?

You’ll have a helpful choice that might speed up the process. 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.

20. I purchased my home in early 2009 before the stimulus bill was enacted. I claimed a $7500 tax credit on my 2008 return as prior law had permitted. Am I restricted to just a $7500 credit?

No, you would qualify for the $8000 credit. Eligible purchasers who have already claimed the $7500 credit on a 2008 return for a 2009 purchase may file an amended return (IRS Form 1040X) for the 2008 tax year. This amended return will enable them to obtain the additional $500 credit amount.

21. If I claim my 2009 $8000 credit on my 2008 tax return, will I have to repay the credit just as the 2008 credits are repaid?

No. Congress anticipated this confusion and has made specific provision so that there would be no repayment of 2009 credits that are claimed on 2008 returns.

22. I made an eligible purchase of a principal residence in May 2008 and claimed the $7500 credit on my 2008 tax return. My brother, who has never owned a home, wishes to purchase a partial interest in the home this spring and move in. Will he qualify for the $8000 credit, as well?

No. Any purchase of a principal residence (or interest in a principal residence) from a related party such as a sibling, parent, grandparent, aunt or uncle is ineligible for the tax credit. Since you and your brother are related in this way, he cannot qualify for the credit on any portion of the home that he purchases from you, even if he is a first-time homebuyer.

23. I live in the District of Columbia. If I qualify as a first-time homebuyer, can I use both the $5000 DC credit and the $8000 credit?

No; double dipping is not allowed. You would be eligible for only the $8000 credit. This will be an advantage because of the higher credit amount, plus the eligibility requirements for the $8000 credit are somewhat more easily satisfied than the DC credit.

24. I know there is no repayment requirement for the $8000 credit. 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. (See below, #24). Note that this same 3-year recapture rule applies, as well, to the $7500 credit available for 2008. This provision is designed as an anti-flipping rule.

25. What if I die or get divorced or my property is ruined in a natural disaster within the 3 years?

The repayment rules are eased for many circumstances. 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.

26. I have a home under construction. Am I eligible for the credit?

Yes, so long as you actually occupy the home before December 1, 2009.

Note: The impact of estimated tax payments would be the same.

Situation 1: Sally plans her withholding so that her withholding is as close as possible to what she anticipates as her income tax liability for the year. When she fills out her 1040, her liability is $6000. She has had $6000 withheld from her paycheck. She also qualifies for the $8000 homebuyer credit.

Result: Sally’s withholding satisfies her tax liability and reduces it to zero. She will receive a refund of the full $8000.

Situation 2: Nick and Nora file a joint return. Nick is self-employed and makes estimated payments; Nora has taxes withheld from her salary. When they compute their taxes, their combined withholding and estimated tax payments are $11,000. Their income tax liability is $9800. They also qualified as first-time homebuyers and are eligible for the $8000 refundable tax credit.

Result: Ordinarily, their combined estimated tax payments and withholding would make them eligible for a refund of $1200 ($11,000 - $9800 = $1200). Because they are eligible for the refundable tax credit as well, they will receive a refund of $9200 ($1200 income tax refund + $8000 refundable tax credit = $9200)

Situation 3: Cesar and LuzMaria both have income taxes withheld from their salaries and file a joint return. When they file their income tax return, their combined withholding is $5000. However, their total tax liability is $7200, generating an additional income tax liability of $2200 ($7200 - $5000). They also qualify for the $8000 first-time homebuyer tax credit.

Result: Cesar and LuzMaria have been under-withheld by $2200. Ordinarily, they would be required to pay the additional $2200 they owe (plus any applicable interest and penalties). Because they are eligible for the refundable homebuyer tax credit, the credit will cover the $2200 additional liability. In addition, they will receive an income tax refund of $5800 ($8000 - $2200 = $5800). If they owed penalties and/or interest, that amount would reduce the refund.

Friday, November 7, 2008

The New Tax LawsA Quick Heads-Up for April 15th
April 15th may be months away, but you know what they say about time flying by. And, considering that most of us will file our returns before the actual deadline, tax season is pretty much right around the corner. In the tradition of keeping our readers one step ahead of things, we thought it would be a good idea to inform you of some of the new tax laws.
Returning for his yearly tax advice is Trevor Rice, a certified public accountant and shareholder with Stern, Kory, Sreden and Morgan in Santa Clarita, California. According to Mr. Rice, there are a few new laws designed to benefit individuals, as well as businesses.
New Tax Laws for Individuals Rice says, "Due to the recent housing crisis, some relief has been provided." In the past, if you were to have lost your principal residence due to either foreclosure or a short sale, you could have paid taxes on the difference of what you owed on the loan.
For houses lost in 2008 and extending through 2012, Rice says that a forgiven debt up to $2,000,000 will generally be tax-free. While it may not completely ease the pain of losing a home, this new tax law will allow people to move on with their lives much more quickly.
Another new tax law that will benefit individuals applies to first-time home buyers, or anyone who has not owned a home within the last 3 years. According to Rice, if you fall into either of these categories, you may be eligible to receive a refundable tax credit for ten percent of the price of the home, up to a maximum credit of $7,500. There is a catch however.
Starting in 2010 and over the 15 years that follow, you will have to repay this credit to the government. Before you start shaking your head, understand that, at most, this would mean $500 a year would be deducted from your tax refund, or added to the taxes you owe.
New Tax Laws for BusinessesThe first law, says Rice, came about with the Economic Stimulus Act of 2008. It carries two main benefits in the form of deductions for any equipment that was purchased for a business in 2008.
In the past, if you purchased business equipment, there was the possibility of deducting up to $125,000 of the total cost for that year. You could then deduct a prorated portion of the assets' worth in the years that followed. The amount of years you could do this was based on the type of equipment purchased.
Rice says, "The first bit of good news is that the deduction has been increased to $250,000," adding that it makes 2008 an optimal year for reinvesting in your business in the form of equipment and related assets. He went on to say, however, that the real benefit of this new law is in the flexibility it provides.
If the $250,000 deduction doesn't make good tax sense, Rice suggests looking into "Bonus Depreciation", a portion of the new tax law that allows you to deduct up to 50 percent of the cost of any equipment purchased in 2008. The remainder would then become deductions over the course of the predetermined "life" of the equipment.
Adding that in some cases it may be possible to use both tax laws simultaneously, Rice urges that you consult with a qualified tax professional about the possibilities for taking advantage of them while they are still here - they each expire at the end of 2008.
Another change has to do with the amount you can deduct for the purchase of a luxury car for business purposes. According to tax law, a luxury car constitutes any passenger car that was purchased for around $15,000 and up. In the past, you could deduct $3,060 in the year it was purchased. Rice says that for this year only, the amount of the deduction will jump to $11,060!
Parting ShotsWhen asked if he had any advice for next year's tax planning, or for finances in general, Rice offered up a few suggestions.
"Start your tax planning with a professional now," he says. Tax laws frequently change. Some laws expire and need to be taken advantage of this year, while other credits and deductions are better to be deferred. Rice maintains that by acting now, a qualified tax professional can give you the best advice for your situation and more importantly, give you a head start for next April.
In terms of one's personal finances, Mr. Rice says that since the stock market is down, it's traditionally thought of as a good time to buy. Understanding that the market will eventually turn around, Rice is in line with this thought, but says there's a little more to the picture. He suggests that you stay very much on top of your portfolio, with a focus on keeping it diversified. This, he says, is the best way to successfully ride out a volatile market.
Due to this volatility, Rice also suggests that anyone nearing retirement should look at how they are invested and consider the prospect of moving their money into more conservative investments. A qualified financial planner would be a good person to talk to about this.
Lastly, Rice cautions all of us that in terms of taxes, state law does not have to conform to federal law. What this means is that you cannot necessarily count on these new credits also applying to your state taxes. He says, "Check your state laws, or better yet, ask your accountant what he or she has to say."
Trevor Rice has been a practicing CPA for the past eleven years. A graduate of California State University at Northridge, Trevor also holds the title of CVA (Certified Valuation Analyst.) He currently practices at Stern, Kory, Sreden and Morgan in Santa Clarita, California where he is also a shareholder. Trevor specializes in both individual and business taxation. He can be contacted via email at Trevor@SKSM.com.

Tuesday, October 14, 2008

House Bill HR3221 Summery

House Bill HR3221 Summary
Limits subject to change without notice. Subject to FHA qualifications.

(Source: Mortgage Bankers Association Press Release 7/28/2008)
This week, President Bush signed Federal Housing Bill HR3221.
This is a summary of some of the items included in that bill and how it will affect consumers.

the development of low-income and affordable housing by
harmonizing multi-family FHA mortgage insurance programs
with the low income housing tax credit. Allowing these two
programs to work together will result in more effective uses of
both programs.

the Treasury Secretary to temporarily increase the GSEs’ line
of credit and to, if necessary, buy equity in the GSEs in order to
provide confidence to credit markets. Also provides a role for
Treasury and the Federal Reserve in GSE oversight to ensure safety
and soundness.

to be delivered seven days prior to loan closing, requires that
disclosures include examples of how payments would change
based on rate adjustments in addition to disclosing the maximum
possible payment under the loan terms and mandates that the
consumer receive early disclosures before paying anything more
than a nominal fee that covers the cost of a credit report.
EMPOWERING STATES: Raises the cap by $11 billion on tax-free
bonds that state housing finance agencies may use to help at-risk
homeowners by refinancing troubled loans and appropriates
$4 billion for states to purchase and renovate abandoned and
foreclosed properties.

LICENSING: Encourages state officials to create a national
licensing system for residential loan originators, allows HUD
to create its own national licensing system if the states fail,
establishes minimum qualifications for all loan originators and
requires federal regulators to create a registry for banks and thrift
employees who originate loans.

FHA CHANGES INCLUDE: Modernization: $25 million
appropriation to improve technology, processes, program
performance, eliminate fraud and provide appropriate staffing.
LOAN LIMITS: Effective January 1, 2009, it also increases the
FHA loan limit to the lesser of 115 percent of the local median
home price or $625,500 with a floor for lower priced markets
of $271,000, establishes a 12-month stay on FHA’s proposal for
risk-based premiums, sets the down payment requirement at 3.5
percent and prohibits seller-funded down payment assistance
(both direct or through a third party).

GSE (Government Sponsored Enterprise) OVERSIGHT REFORM: A
new regulatory position is created (five-year term, appointed by
the President, confirmed by the Senate) with oversight authority
similar to that of bank regulators. This person establishes a new
affordable housing fund and capital magnet fund to be funded
by a 4.2 basis point fee on all new loans, significantly changes the
affordable housing goals and raises the conforming loan limit to
the higher of $417,000 or 115% of the local median home price,
not to exceed $625,500 (effective January 1, 2009).

FHA RESCUE: Creates a voluntary program for lenders to lower
the loan balance in exchange for an FHA guaranteed loan not
to exceed 90 percent of the newly appraised value of home. The
lender pays a 3 percent FHA loan origination fee. To qualify, the
borrower must have a debt-to-income ratio above 31 percent on
the original loan. Program is capped at $300 billion.

TAX INCENTIVES: Creates a $7,500 refundable tax credit for firsttime
homebuyers. Expands the volume cap for the low-income
housing tax credit. Allows for tax-exempt treatment of bonds
guaranteed by the Federal Home Loan Banks and exempts the
low income housing tax credit from the alternative minimum tax.
Ask Your Axiom Mortgage Consultant about this information and other
government sponsored lending programs for your clients.

What is happening with loans in the market?

As you may have heard, the Federal Reserve cut their key lending rates by ½%. This was done in conjunction with other world banks in an effort to bolster the world economy. The Fed cut their Funds Rate from 2.0 to 1.5 percent. They also cut their Discount Rate from 2.25% to 1.75%.

What does this mean for you?
The Funds Rate is the rate which affects short term borrowing – like credit card rates, home equity line rates, the Prime rate. These are short-term variable rates. The Discount Rate is the rate which banks borrow money from the Fed on an overnight basis to meet their cash reserve requirements. The Federal Reserve hopes that by lowering both of these rates, spending and consumer confidence will increase and lend strength to the economy.

So will mortgage rates change?
Here is a simple summary: Mortgage rates are long-term rates. They are not directly influenced by the Fed changing their short-term rates like they did last night. They are tied to the trading of mortgage-backed securities. Demand for those types of securities is lower right now due to the persistent weakness in the mortgage sector. Lower demand for these securities doesn’t help long-term rates go lower. For example, mortgage-backed securities (FNMA’s and GNMA’s) are trading about 11/32 worse this morning than yesterday (as of 8:10 this morning). What that means is that you would pay between ¼ and 3/8 points more today to get the same rate as yesterday. For example, on a $200,000 loan, you might pay $400-600 more in one-time fees (“points”) at closing for whatever rate you locked today, vs. if you locked yesterday.

What does the future hold?
Concerns about the mortgage market continue to minimize downward pressure on interest rates. My opinion: if you have a property picked out and loan in process right now and you are locked in, you are in a good position; that’s where I would be. If you are shopping for a home, as soon as you have an offer accepted on one, let’s talk about locking in. Rates don’t seem to be shooting up, but they aren’t going down either. That could obviously change. I’m not an expert but my feeling is that until some stability is restored, we may see continued weakening in the stock market and a lack of downward pressure on rates. If something changes and rates go lower, then we will take advantage of that wherever possible.

Buying a House

All of America seems to be going though a time a fear and waiting when it comes to buying a house. Will the market go down? Will the economy get worse? One thing about a house is, it is one investment that will over your life time, will continue to gain value and be something of service to your life and family while it gains value for you.
The best advice right now is buy something you can afford and will be comfortable in for a minimum of 4 years. Use a fixed rate loan, or at least be educated in the kinds of loans available and feel comfortable that you can make the payments.
Interest rates are on the low end of what they have been over the last 20 years. A fixed rate loan will keep your interest and principal payment the same over the life of your loan. A house is a security, that along with being affordable, can give you peace of mind for the short term and long term investment. Even if the market dips a little more, interest rates are slowly rising and for most people the payment can even be higher on a less expensive home then a higher priced home if the interest rate is higher. Every day there is a good deal out there, and everyday there is a good house that would be a nice place to live. It is a good time to buy.

Thursday, October 9, 2008

is this working

Real Estate in Salt Lake City Utah and Surrounding areas