On November 7th, 2009, the IRS extended the homebuyer’s tax credit program.  Because of a high amount of fraud claims, the rules got tougher and as a result, there are documentation requirements.  But interestingly enough, the IRS actually expanded some of the benefits of the program.

Let’s take a look (also, if you have any questions, please click here to contact us at Taulli.com):

What is a tax credit?

A tax credit allows you to reduce your tax obligation dollar-for-dollar.  This is better than a deduction, which reduces your income (which is then taxed).

Moreover, the homebuyer’s credit is refundable.  This means that even if you do not owe any taxes, you will still get a check from the IRS.

What is the deadline?

You must purchase the home by April 30th, 2010 and the transaction must close by June 30th, 2010.  If you miss the deadline, you still may be able to get the credit if you have a binding contract before May 1st.

If you are a member of the armed forces — who has served at least 90 days overseas — the deadlines are extended by one year.

When will you get your refund?

Because of the documentation requirements, you may not receive a refund until four to eight weeks.  Of course, this assumes your return is in order and has the necessary documents attached.

To speed things up, you might want to setup a direct deposit arrangement with the IRS.

Who is eligible?

There are two types of homebuyers that qualify for the credit (both rules apply to the spouse as well):

First-Time Homebuyer:  This is someone who has not owned a home during the three-year period ending on the purchase date of a home.

Example:  Four years ago, you sold your home for $400,000 because you thought real estate prices were ready for a fall.  Since then, you have rented.  In this case, you would be eligible for the credit.

Long-Time Resident:  This is someone who has owned and used the same home as the main home for any 5-year consecutive period during the eight-year period on the purchase date.  In other words, it is possible for an existing home owner to qualify for the credit.

Example:  Two years ago, you sold your house for $500,000.  You owned it for six years.  The house was also your principal residence.  Since then, you have rented a place.  But early this year, you agreed to purchase another home.  In this case, you would be eligible for the homebuyer’s tax credit.

Keep in mind that if the house costs more than $800,000 you cannot get the credit.

How do you calculate the credit?

The credit depends on what type of buyer are you are:

First-Time Homebuyer:  The credit is 10% of the purchase price for a maximum of $8,000 ($4,000 if married filing separately).

Long-Time Resident:  The credit comes to 10% of the purchase price for a maximum of $6,500 ($3,250 if married filing separately).

What do you need to file?

To get a refund, you will need to fill out Form 5405.

You will also need to substantiate the credit.  This is done by attaching documents that prove you are eligible.  As a result, you cannot e-file your return.

To prove your claim, you need to provide one of the following:

• A copy of your settlement statement that has all the parties’ names and signatures, the property address, the contract sales price and the date of purchase.  This is usually the executed Form HUD-1, Settlement Statement.
• If you cannot get a settlement statement — since you purchased a mobile home — then you can provide a copy of the executed retail sales contract, which shows all the parties’ names and signatures, the property address, the purchase price and the date or purchase.
• If the property is a newly constructed home and there is no settlement statement, then you can get a certificate of occupancy that shows your name, the property address, and the date of the certificate.

Next, if you are a long-time resident, then you must show evidence you lived in the home for a five-consecutive period over the past eight years.  To this end, you will need to provide one of the following:

• Form 1098, Mortgage Interest Statement (or substitute statement)
• Property tax records
• Homeowner’s insurance records.

What is considered a home for the credit?

A home is a detached:

• House
• Condominium
• Town house
• Co-op
• Mobile home (affixed to land)

Moreover, the above must be your principal residence.

Are there income limits?

Unfortunately, you may not qualify for the credit because of your modified adjusted gross income (MAGI). 

Your credit will phaseout based on the following:

Single Taxpayer

• Purchase before November 7th:  MAGI of $95,000 or over
• Purchase after November 6th:  MAGI of $145,000 or over

Married Taxpayer

• Purchase before November 7th:  MAGI of $170,000 or over
• Purchase after November 6th:  MAGI of $245,000 or over

What are some of the other limits on the credit?

You cannot get the credit if:

• You are a nonresident alien.
• The home is located outside the US.
• You purchased a home from a relative (spouse, parents, grandparents, children, grandchildren) or a corporation or partnership you have a majority interest in.

The following are limits for a home purchased after November 6th, 2009:

• You purchased a home from a person related to your spouse (see the rule above) or a business with a majority interest.
• If you can be claimed as a dependent on another person’s tax return.
• You are under 18 (this also includes your spouse) on the date of the purchase.

For what tax year can you claim the credit?

You claim the credit on your 2008 return or amended return for a purchase in 2009.  Or, you can claim the credit on your 2009 return or amended return for a purchase in either 2009 or 2010.  Basically, you select the year that you get the most tax benefits.

Can you use the credit for a down payment or for closing costs?

Yes, it is possible so long as it is used for the down-payment requirement — which comes to 3.5% — for FHA-insured loans.  The loan must also be processed through a state housing finance agency.  You can find out more at www.ncsha.org.

Might you have to give back the credit?

To keep the credit, you need to stay in the home for the next three consecutive years.  If you sell the home or no longer use it as a primary residence before this time, you will have to repay your credit back to the IRS.  The exception is for qualified military personnel who are on extended duty.

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Hiring can bring on mixed feelings.  On the one hand, the expenses and managerial responsibilities can be daunting.  There are also severe penalties for violating payroll tax laws.

Then again, hiring can mean bringing on board top-quality people, resulting in more growth and profits.  Of course, the business can deduction the expenses for:  employee compensation, employment taxes and fringe benefits.  Or, if you have contractors, you can deduct for these payments too.

Here are some helpful resources:

• What compensation can you deduct?
• When can you deduct deferred compensation?
• How are employee fringe benefits deducted?
• What are employee fringe benefits?
• Can you deduct plan administration costs?
• What are employment tax credits?
• What are payroll taxes?
• What if you do not pay the payroll tax?
• How to deal with payroll tax problems?
• What’s the difference between an employee and contractor?
• What if you hire a contractor?
• What employee tax credits are available?
• Do you need to notify an employee if he or she is eligible for the earned income credit?
• How do you report compensation expenses?
• How do you reimburse employees for business expenses?
• Do you have to reimburse employees for business expenses?
• What if you employ your children?
• What if you employ your spouse?
• So, will the IRS be alerted if you hire family members?
• What if you hire yourself?
• Can an owner salary be a red-flag for an audit?
• Are draws a deductible expense?

• What is an employee stock option?
• What is an employee stock option plan?
• What is an employee stock option agreement?
• What is a nonqualified stock option?
• What are Incentive Stock Options (ISOs)?

Once you are the subject of an audit, there’s a chance you may get audited again.  The IRS wants to see if you have, in fact, changed your behavior.

But, what if there was nothing wrong with the original audit — or only a minimal problem?  In this case, you may be successful in having the second audit discontinued.

To do this, send the IRS copies of the following:  the audit appointment letter; the no-change letter from the prior audit; and a copy of the return.