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Henry J. Taylor

Credit for first-time homebuyers.

An individual who is a first-time homebuyer of a principal residence in the U.S. is allowed a credit against income tax and alternative minimum tax (AMT) for the tax year of the purchase.

The credit is equal to 10% of the purchase price. The maximum credit is $8,000. Thus, the full credit is available for homes costing $80,000 or more. For married individuals filing separately, the maximum credit is $4,000.

For certain “long-time residents” purchasing a new principal residence, the maximum credit is $6,500 ($3,250 for married individuals filing separately).

Both unmarried individuals and married couples filing jointly can claim an $8,000 credit ($6,500 for “long-time residents”).

For allocation of the credit if two or more unmarried individuals purchase a residence,the IRS has explained that the credit can be allocated among two or more taxpayers who aren't married using any reasonable method. A reasonable method doesn't include any allocation to a taxpayer who isn't eligible to claim that portion, but does include allocating the credit between taxpayers who are eligible to claim the credit based on the taxpayers' contributions to the purchase price as either tenants in common or joint tenants or the taxpayers' ownership interests as tenants in common.

The credit is phased out based on the taxpayer's modified adjusted gross income (AGI).  The credit phases out for individual taxpayers with modified AGI between $125,000 and $145,000 ($225,000 and $245,000 for joint filers) for the year of purchase. The beginning and end points of the phaseout are the same whether the taxpayer qualifies for a maximum credit of $8,000 or $6,500 (for purchases by long-time residents).

The first-time homebuyer credit is refundable. Thus, the first-time homebuyer credit may provide a refund even to taxpayers who don't owe any tax.

For example, a first-time homebuyer purchases a principal residence and claims an $8,000 credit for 2009. The taxpayer's tax liability for 2009, before application of the credit, is $6,000.

The credit reduces the taxpayer's tax to zero. In addition, the taxpayer will receive a $2,000 refund.

No minimum amount of income is required to claim the credit. Someone with no taxable income can file a return solely for the purpose of claiming the credit.

The first-time homebuyer credit is claimed on Form 5405, which is filed with the taxpayer's 2008, 2009, or 2010 income tax return.

A taxpayer who purchased a home before Nov. 7, 2009, and elects to claim the credit on an original or amended 2008 return may use the Feb. 2009 version of Form 5405.

IRS is preparing a Dec. 2009 version of Form 5405. This version must be used by:

... taxpayers who purchase a home after Nov. 6, 2009, and

... taxpayers claiming the credit on their 2009 returns, no matter when the home was purchased.

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