How does $8000 home buyer tax credit work?

What does first time home buyer exactly mean?  "First time home buyer" is a home buyer who has not owned a principal residence for the last three years. For married tax payers, both you and your spouse must be "first time home buyers" in order to qualify for the housing tax credit. For unmarried joint purchases, either of the qualifying partner may be a "first time homebuyer". In this case the $8000 housing tax credit can be allocated to any of the partners.

Dates of home purchase - In order to qualify for the home buyer tax credit, the first time home buyer must purchase the house between January 1 2009 and December 1 2009, both dates inclusive.

How much tax credit will homebuyers get? - Although this tax credit is referred to as $8000 housing tax credit, remember that the total amount of tax credit a home buyer gets is equal to 10% of the purchase price of the new house upto maximum of $8000. In order to get a full tax credit of $8000 your purchased property must be above $80,000 in value.

Income Limits for $8000 home buyer tax credit: First time home buyers with modified gross annual income of $75,000 get full benefit of this housing tax credit. The tax credit is gradually reduced for those with income between $75,000 to $95,000 and finally a home buyer gets no tax credit if his/her modified gross annual income is more than $95,000. For married taxpayers, the home buyer tax credit is gradually reduced to zero for modified gross annual income between $150,000 to $170,000.

This is a Refundable Tax Credit - This is a tax credit and not a tax deduction. Qualified first time home buyers deduct $8000 from their total tax owed to the IRS and NOT the total taxable income. Moreover a refundable tax credit means that in case the total taxes you owe to the IRS are less than $8000, you can actually get a refund for the balance amount!

This $8000 home buyer tax credit, unlike $7500 tax credit does NOT need to be repaid to the IRS - the earlier $7500 housing tax credit was essentially an interest free loan which the home buyers needed to repay in 15 years. However, although this $8000 home buyer tax credit may look only $500 more than the previous housing tax credit, it is all yours ! no need to repay it to the Federal government.

Can you claim your $8000 first time home buyer tax credit in 2008 tax return itself or do you have to wait till you file 2009 tax return? The law allows any qualified purchases made in 2009 to be treated as if the purchase was made on December 31 2008. You can claim the $8000 first time home buyer tax credit in 2008 tax return itself by filing form 5405 according to the latest IRS ruling. You can get the benefit of $8000 in 2008 tax return itself.

Income Tax tip for first time home-buyers: If you know you qualify for the $8000 home buyer credit there is no need to wait to file your 2009 tax return in order to get benefit of this housing stimulus. First time home buyers are actually permitted to reduce their income tax withholding by the amount equal to housing credit, i.e. $8000. You can then use this 'extra cash' got by increase in your take home pay for downpayment!