Friday, January 30, 2009

National EITC Awareness Day

Today is the third annual National EITC Awareness Day. The EITC, also known as the Earned Income Tax Credit, is a federal tax credit available for individuals who work but did not earn a significant amount of income. If you are eligible, utilizing the EITC will reduce your taxes and result in a tax refund for you and your family.

To learn more about the EITC and whether you qualify go to


Tuesday, January 20, 2009

IRS takes liberal stance on how homebuyer credit is allocated between unmarried purchasers

Information below provided by Cole Ehmke

Many of you bought a new home or are considering the purchase of a new home, and so you may qualify for a new tax credit. The Housing and Economic Recovery Act of 2008 authorizes a $7,500 tax credit for qualified first-time home buyers purchasing homes on or after April 9, 2008 and before July 1, 2009. The following text outlines provisions for this credit. The credit is recaptured over the next 15 years as an addback to your federal tax liability. Thus, this credit and 15 year payback is in essence a tax free loan by the government to purchase your first home.

If this fits your situation, see your friendly neighborhood tax accountant.

Notice 2009-12, 2009-6 IRB
A new notice provides guidance under Code Sec. 36(b)(1)(C) for allocating the first-time homebuyer credit between unmarried taxpayers. It allows use of any reasonable method and shows how a full credit can be obtained even where one buyer wouldn't qualify for any amount of credit under the phaseout rules.

New refundable tax credit for first time homebuyers. For qualifying purchases of principal residences in the U.S. after Apr. 8, 2008 and before July 1, 2009, eligible first-time homebuyers may claim a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500 ($3,750 for married individuals filing separately). (Code Sec. 36)

Who is eligible. A taxpayer is considered a first-time homebuyer if he (or spouse, if married) had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies. (Code Sec. 36(c)(1))

RIA observation: Because only prior ownership in a principal residence is considered, it's possible for a taxpayer who already owns a vacation home to claim the new credit, if he otherwise qualifies. For example, a taxpayer whose principal residence for at least three years has been a rental apartment in the city, and who owns a seaside home, could claim the credit for the purchase of a new principal residence if his modified AGI doesn't exceed the phaseout levels.

Special rule for 2009 purchases. Eligible first-time homebuyers who purchase a principal residence after Dec. 31, 2008, and before July 1, 2009, may elect to treat the purchase as made on Dec. 31, 2008. ( Code Sec. 36(g).

Meaning of “purchase.” A “purchase” is any acquisition, but only if (i) the taxpayer did not acquire the property from a related person, and (ii) the taxpayer's basis in the property is not determined, in whole or in part, by reference to the basis of the property in the hands of the person from whom the taxpayer acquired the property (e.g., as occurs with a gift), or determined under Code Sec. 1014(a) (relating to property acquired from a decedent). (Code Sec. 36(c)(3)) A person is treated as related to another person if the relationship would result in the disallowance of losses under Code Sec. 267 or Code Sec. 707, except that members of a family of an individual include only the individual's spouse, ancestors, and lineal descendants.

RIA observation: Thus, for example, the credit is not allowed for a home purchased by the taxpayer from his spouse, parent, grandparent, child or grandchild.

Phaseout of credit. The first-time homebuyer credit phases out for individual taxpayers with modified adjusted gross income (MAGI) between $75,000 and $95,000 ($150,000-$170,000 for joint filers) for the year of purchase. MAGI is adjusted gross income for the tax year increased by any amount excluded from gross income under Code Sec. 911 (foreign earned income and foreign housing exclusions), Code Sec. 931 (exclusion of income derived from American Samoa) or Code Sec. 933 (exclusion of income from Puerto Rico). (Code Sec. 36(b)(2)) Specifically, the amount allowable as a credit is reduced by the amount that bears the same ratio to the credit allowable as (1) the excess (if any) of: the taxpayer's modified AGI (MAGI) for the tax year, over $75,000 ($150,000 for a joint return), bears to (2) $20,000. (Code Sec. 36(b)(2)) The credit is completely phased out for a taxpayer whose MAGI is $95,000 ($170,000 for married taxpayers filing a joint return).

Recapture rules. The credit for new homebuyers is recaptured ratably over fifteen years, with no interest charge, beginning with the second tax year after the tax year in which the home is purchased. For each tax year of the 15-year recapture period, the credit is recaptured as an additional income tax amount equal to 6 2/3% of the amount of the credit. As discussed in Federal Taxes Weekly Alert 09/18/2008, this repayment obligation may be accelerated or forgiven under certain exceptions. (Code Sec. 36(f))

RIA observation: In other words, the credit for new homebuyers is the equivalent of a long-term interest-free loan from the government.

RIA observation: On Jan. 15, House Ways and Means Committee Chairman Charles B. Rangel (D-NY) issued a press release outlining the portion of the economic recovery package to be taken up by his committee. The package would include a number of tax breaks including enhancement of the homebuyer credit—for homes bought after Dec. 31, 2008, and before June 30, 2009, it would remove the repayment requirement for the credit.

Where to claim credit. For eligible purchases in 2008, a taxpayer claims the credit by attaching Form 5405, “First-Time Homebuyer Credit,” to the taxpayer's 2008 tax return. For eligible purchases in 2009, a taxpayer may elect to claim the credit for 2008 or 2009 by attaching Form 5405 to the taxpayer's original or amended 2008 tax return or 2009 tax return.

Unmarried persons. Code Sec. 36(b)(1)(C) provides that IRS may prescribe the manner in which the first-time homebuyer credit is allocated between two or more taxpayers who are not married for federal tax purposes and who purchase a principal residence. The total credit allocated between the taxpayers cannot exceed $7,500.

Any reasonable method allowed. Notice 2009-12 says that, for purposes of Code Sec. 36(b)(1)(C), if two or more taxpayers who are not married purchase a principal residence and otherwise satisfy the Code Sec. 36 requirements, the first-time homebuyer credit may be allocated between the taxpayers using any reasonable method. It goes on to say that a reasonable method is any method that does not allocate any portion of the credit to a taxpayer not eligible to claim that portion. A reasonable method includes one that allocates the credit based on (1) the taxpayers' contributions towards the purchase price of a residence as tenants in common or joint tenants, or (2) their ownership interests in a residence as tenants in common. Notice 2009-12 includes several examples of credit allocations, some of which are reproduced below. Unless otherwise indicated, each example assumes that A and B (i) purchased a principal residence on May 1, 2008, (ii) are not married to each other, (iii) do not have MAGI in excess of the MAGI threshold, and (iv) are first-time homebuyers who otherwise satisfy the Code Sec. 36 requirements.

RIA Research References: For the first-time homebuyer credit, see FTC 2d/FIN ¶ A-4271; United States Tax Reporter ¶ 364.

Source: Federal Tax Updates on Checkpoint Newsstand tab 1/16/09

Friday, January 16, 2009

Financial Fitness Quiz

For those who missed the "Making the Most of Your Money" session on Wednesday, I have posted a subset of the questions from the financial fitness quiz activity that Cole Ehmke went through. If you have the time, I encourage you to take the quiz and see how your financial fitness is compared to others. The quiz questions can be found on the right underneath the "Whats Happening" section. Just let me know if you would like to have the complete version of the quiz to get a comprehensive evaluation of your financial fitness.