Will the home buyer credit expire or expand? 

First-time homebuyers have another reason to think about buying a home in 2009, a federal tax credit of up to $7,500.  The credit is 10% of the cost of a home, so a house costing $75,000 will qualify for a full credit.  The credit is refundable, which means that the government will pay you the difference if your tax liability is less than your credit amount.  Under the current law, you are required to pay the credit back over 15 years, so 6.67% of the credit each year ($502.50 a year for a full credit) is added annually to your tax bill.

Currently, you have until July 1 of 2009 to buy and get the credit, but when the new Congress convenes in January, it will look at extending the credit, making it available to all homebuyers and eliminating the current payback requirement. 

The current credit has an income limit.  You must have “modified” adjusted gross income (MAGI) of $150,000 or less if you are a couple filing a joint return, $75,000 or less if you’re single to get a full credit.  You can still get a partial credit up to $170,000 MAGI (joint) and $95,000 (single).

Because of the payback requirement, the credit really is more like a 15-year (or less) interest-free loan from the government than an outright gift, but that could change if Congress modifies the program.  What constitutes a “first-time homebuyer?”  It is a person who has not owned a principal residence in the three years prior to the date of purchase of the home for which the credit is being claimed.

If you buy early in the year, how do you get the benefit of the credit in advance of filing your 2009 return in 2010?  You can start reaping the benefits right away by adjusting your tax withholding (file a new W-4 form) with your employer or taking the credit into account when filing estimated taxes.  You also have the option of claiming the credit on your 2008 tax return. You can file an amended return if you have already filed your return before you conclude the purchase.  © 2007, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc. & Choice Finance®