The First-Time Home Buyer Tax Credit

October 23, 2009 – The First-Time Home Buyer Tax Credit
The First-Time Home Buyer Tax Credit – did it work? Yes – it did what a credit should do, it influenced behavior. What is it? The U.S. Government has offered a tax credit of up to $8000 for first-time qualified home buyers, if they buy a primary home before November 30, 2009. What are the qualifications? The buyer cannot have owned a primary home for three years prior to purchasing a home in 2009, they cannot buy from ancestors or a spouse, and income is limited to $75,000 MAGI for a single taxpayer and $150,000 MAGI for married taxpayers filing jointly.

The best part about the tax credit is that it is refundable. There is a big difference between non-refundable and refundable tax credits. Also, the tax credit goes directly on the 1040, eliminating the need for another form.

What will happen once the tax credit is no longer valid? The market will fall off, no doubt. However, getting new buyers into a home will have a ripple effect of spending – that’s what we call the multiplier in economics class. People need to buy furniture, spend on landscaping and improvements, and, as all of us homeowners know, the list goes on for years.




Is a tax credit the best way to use Federal funds? The National Association of Realtors seems to think so – they are lobbying for an extension of the credit. My concern – will this new crop of homebuyers be able to stay in their homes and pay the bills? Presumably with tighter credit standards, they’ve passed a higher credit hurdle than the folks who need only a pulse to qualify for a mortgage in recent years.

Important Sidebar: Tax credits explained
What exactly is a tax credit? It’s a reduction of the taxes you owe, after the amount is calculated. This is different than a deduction, which reduces the amount of taxable income before the final calculation. Credits are usually better than deductions, because they can be refundable, which means that if the taxes you owe fall to a negative number, the U.S. government will actually send money back to you. If you have a tax deduction which causes the taxes you owe to fall to zero, you won’t owe taxes, but you won’t get a refund.