2008 continues to bring about a number of new tax laws as well as changes in existing laws. Some of these laws are either creative or bizarre, as a credit is no longer a credit, and is in fact a loan from the US Treasury. The Housing Assistance Tax Act of 2008 included the following changes.
First Time Home Buyer Temporary Tax Credit
The word temporary is not a misprint. The Housing Act gives first time home buyer a temporary refundable tax credit of up to 10% of the purchase price of a home (maximum credit $7,500 for married filing joint and single filers and $3,750 for married filing separately). The credit phases out between $150,000 and $170,000 for married couples and $75,000 to $95,000 for single filers. It is refundable to the extent that it exceeds the buyer’s regular tax liability, but does not offset the alternative minimum tax. The credit is effective for homes purchased on or after April 9, 2008 and before July 1, 2009.
The tax credit must be claimed on a 2008 or 2009 tax return. An individual who purchases a home in 2009 has the option of taking the credit on their 2008 tax return.
However, the tax credit is in reality an interest free loan from the government. The $7,500 must be repaid to the government over a 15 year period ($500 a year), interest free. Repayments start two years after the residence is purchased.
A first time home buyer is defined as a person who has not had an ownership interest in a principal residence during the three year period before the new home is purchased. So if you are an expatriate on a 3 year or more assignment who sold their home before you moved to Bermuda, where you rent, if you are returning to the US and purchase a new principal residence after April 9, 2008 and before July 1, 2009 you will qualify for the credit/loan.
If you sell your principal residence or the home no longer becomes your principal residence, before the credit/loan has been repaid, the unpaid balance becomes due in the year the residence is sold, if the gain on the sale is more than the unpaid credit/loan. If the gain on the sale is less than the unpaid credit/loan, you pay back the lesser amount. If the home is sold at a loss, you do not have to pay back the unpaid credit/loan. If you die before the credit/loan has been repaid, your debt will be forgiven.
Property Tax Deduction for Nonitemizers
Individuals who have paid off their mortgage are likely to take the standard deduction rather than itemizing deductions. For 2008 only, individuals who take the standard deduction and who own a home can take a one time deduction for real estate taxes paid up to a maximum of $1,000 for married filing jointly and $500 for single filers.
Home Sale Exclusion Is Reduced If Home Is Rented or Used as a Vacation Home
Gain from the sale of a home will no longer be eligible for the $500,000 exclusion of gain from income (married filing joint) or $250,000 exclusion of gain from income (single filers) for periods that the home was not used as a principal residence on or after January 1, 2009.
The new law will work as follows. Suppose that you bought a home in Boston for $500,000 in January 2004 and lived in it as your personal residence until your employer sent you on a 3 year assignment to Bermuda in January 2009. You rent your Boston home while working in Bermuda. You move back into your Boston home in January 2012 and sell the home in January 2014 for a $400,000 gain. Because you owned and lived in the home for 2 of the 5 years preceding the sale you used to be able to claim the $500,000 exclusion and pay no tax on the $400,000 gain.
However, under the new law as the house was used 30% of the time ( 3 years out of 10 years) as a “non qualifying use”, 30% of the gain of $400,000 or $120,000 will be subject to tax and only $280,000 of the gain can be excluded.
Credit Card Information Reporting
Under the new law banks and other processors of merchant credit card transactions will be required to report the merchant’s annual gross receipts to both the IRS and the merchant. This new law is effective for sales on or after January 1, 2011.
Mortgage Interest Payments On Another Person’s Home
In a recent tax court case a son took out a mortgage to buy a home for his parents who were unable to qualify for a mortgage on their own. The son held title to the property and the parents were not guarantors of the loan. However, the parents made all the mortgage payments, paid the real estate tax, as well as all upkeep for the home. The parents took a deduction for the mortgage interest and real state taxes on their return. The tax court held that the parents were the homes equitable owners bearing all burdens and benefits of ownership and allowed the deductions. This case should be of interest to US citizens who are married to Bermuda nationals and whose salary is used to pay the monthly mortgage payments.
Who Is Bearing the Tax Burden?
The top 1% of filers, defined as those with gross income over $388,800, paid almost 40% of all Federal income taxes, according to Internal Revenue Service data. The next 4% of filers, defined as those with gross income of over $153,500 paid almost 20% of all Federal income taxes. The next 5% of filers, defined as those with gross income of over $108,900 paid about 10% of all Federal income taxes. Thus, 10% of all tax filers paid over 70% of the total Federal income taxes even though they had only 47% of the total adjusted gross income.
Who says that the rich are not paying their fair share of income taxes? |