Boge Wybenga & Bradley PC

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Home Buyer Tax Credit
On November 6, the President signed into law H.R. 3548, the ''Worker, Homeownership, and Business Assistance Act of 2009.'' The new law extends and generally liberalizes the tax credit for first-time homebuyers, making it a much more flexible tax-saving tool. It also includes some crackdowns designed to prevent abuse of the credit. These important changes could it make it easier for you or someone in your family to buy a home. And because the changes generally aid buyers and aim to improve residential real estate markets nationwide, they also could make it easier for you or someone in your family to sell a home. This Client Letter fills you in on the details you need to know about the first-time homebuyer credit.

Homebuyer credit basics. Before the new law was enacted, the homebuyer credit was only available for qualifying first-time home purchases after April 8, 2008, and before December 1, 2009. The top credit for homes bought in 2009 is $8,000 ($4,000 for a married individual filing separately) or 10% of the residence's purchase price, whichever is less. Only the purchase of a main home located in the U.S. qualifies. Vacation homes and rental properties are not eligible. The homebuyer credit reduces one's tax liability on a dollar-for-dollar basis, and if the credit is more than the tax you owe, the difference is paid to you as a tax refund. For homes bought after Dec. 31, 2008, the homebuyer credit is recaptured (i.e., paid back to the IRS) if a person disposes of the home (or stops using it as a principal residence) within 36 months from the date of purchase.

Before the new law, the first-time homebuyer credit phased out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase.

(1) New lease on life for the homebuyer credit. The homebuyer credit is extended to apply to a principal residence bought before May 1, 2010. The homebuyer credit also applies to a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May 1, 2010, to close on the purchase of the principal residence before July 1, 2010. In general, a home is considered bought for credit purposes when the closing takes place. So the extra two-months (May and June of 2010) helps buyers who find a home they like but can't close on it before May 1, 2010. They can go to contract on the home before May 1, 2010, close on it before July 1, 2010, and get the homebuyer credit (if they otherwise qualify). Note that certain service members on qualified official extended duty service outside of the U.S. get an extra year to buy a qualifying home and get the credit; they also can avoid the recapture rules under certain circumstances.

(2) The homebuyer credit may be claimed by existing homeowners who are “long-time residents.” For purchases after November 6, 2009, you can claim the homebuyer credit if you (and, if married, your spouse) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that you buy the subsequent principal residence. For example, if you and your spouse are empty nesters who have lived in your suburban home for the past ten years, you are potentially eligible for the credit if you “move down” and buy a smaller townhome. There's no requirement for your current home to be sold in order to qualify for a homebuyer credit on the replacement principal residence. Thus, the replacement residence can be bought to beat the new deadlines (explained above) before the old home is sold. For that matter, you can hold on to your prior principal residence in the hope of achieving a better selling price later on.

The maximum allowable homebuyer credit for qualifying existing homeowners is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.

(3) The homebuyer credit is available to higher income taxpayers. For purchases after November 6, 2009, the homebuyer credit phases out over much higher modified AGI levels, making the credit available to a much bigger pool of buyers. For individuals, the phaseout range is between $125,000 and $145,000, and for those filing a joint return, it's between $225,000 and $245,000.

(4) There's a new home-price limit for the homebuyer credit. For purchases after Nov. 6, 2009, the homebuyer credit cannot be claimed for a home if its purchase price exceeds $800,000. It's important to note that there is no phaseout mechanism. A purchase price that exceeds the $800,000 threshold by even a single dollar will cause the loss of the entire credit.
The new purchase price limitation applies whether you are buying a first-time principal residence or are a qualifying existing homeowner purchasing a replacement principal residence.

Other homebuyer credit changes. The new law includes a number of new anti-abuse rules to prevent taxpayers from claiming the homebuyer credit even though they don't qualify for it. The most important of these are as follows:

Beginning with the 2010 tax return, the homebuyer credit can't be claimed unless the taxpayer attaches to the return a properly executed copy of the settlement statement used to complete the purchase of the qualifying residence.
For purchases after Nov. 6, 2009, the homebuyer credit can't be claimed unless the taxpayer has attained 18 years of age as of the date of purchase (a married person is treated as meeting the age requirement if he or his spouse meets the age requirement).
For purchases after Nov. 6, 2009, the homebuyer credit can't be claimed by a taxpayer if he can be claimed as a dependent by another taxpayer for the tax year of purchase. It also can't be claimed for a home bought from a person related to the buyer or the spouse of the buyer, if married.
Beginning with 2009 returns, the new law makes it easier for the IRS to go after questionable homebuyer credit claims without initiating a full-scale audit.

What hasn't changed. The tax law still gives you the extraordinary opportunity to get your hands on homebuyer credit cash without waiting to file your tax return for the year in which you buy the qualifying principal residence. Thus, if you buy a qualifying principal residence in 2009 you can treat the purchase as having taken place this past December 31, file an amended return for 2008 claiming the credit for that year, and get your homebuyer credit cash relatively quickly via a tax refund. Similarly, you can treat a qualifying principal residence bought in 2010 (before the new deadlines) as having taken place on December 31, 2009, and file an original or amended return for 2009 claiming the credit for that year.

What also hasn't changed is the need for getting expert tax advice in negotiating through the twists and turns of the new beefed-up homebuyer credit. Please call us today for details on how the homebuyer credit can help you or your family members.
American Opportunity CreditThe American Opportunity tax credit (the Hope credit, as modified for 2009 and 2010) and the Lifetime Learning credit for “qualified tuition and related expenses” (see below) may allow you to turn part of the higher education expenses you incur for yourself, your spouse, or your dependents into tax savings.

The maximum American Opportunity tax credit a taxpayer may claim is $2,500 per student (for both 2009 and 2010) for the first four years of undergraduate education at an eligible educational institution. The maximum Lifetime Learning credit that may be claimed is $2,000 per year per taxpayer, for any post-high school education (including graduate-level courses and courses to acquire or improve job skills) at an eligible educational institution.

Generally, eligible educational institutions are accredited schools offering credit toward a bachelor's or associate's degree or other recognized post-high school credential, and certain vocational schools.

The American Opportunity tax credit is available only for the qualified tuition and related expenses of an eligible student, i.e., a student who's enrolled in a degree or certificate program at an eligible educational institution on at least a half-time basis, and who has never been convicted of a federal or state felony drug offense. The Lifetime Learning credit is not subject to the eligible student/felony drug offense restrictions, and may be available for a student taking only one course.

Neither credit is allowed for an expense that's otherwise deductible (for example, as a business expense). However, taxpayers can elect to claim either a credit or an above-the-line deduction for qualified tuition and related expenses. Most taxpayers will be better off taking the credit, but in certain cases taxpayers should elect out of the credit and claim the deduction instead. I can advise you about whether the credit or deduction is more beneficial in your case.

A taxpayer may claim an American Opportunity tax credit or a Lifetime Learning credit for a tax year and exclude from gross income amounts distributed (both the principal and the earnings portions) from a Coverdell education savings account (formerly called an education IRA) for the same student, as long as the distribution isn't used for the same educational expenses for which a credit was claimed. Similarly, a taxpayer may claim an American Opportunity tax credit or Lifetime Learning credit for a tax year and also exclude from gross income amounts distributed (both the principal and the earnings portions) from a qualified tuition program (also known as a 529 plan) on behalf of the same student, as long as the distribution isn't used for the same expenses for which a credit was claimed.

The American Opportunity/Lifetime Learning credits may not be claimed in the same tax year for the same expenses, but each may be claimed for different expenses. For example, in the same tax year, a taxpayer may claim the American Opportunity tax credit for the qualified tuition and related expenses of one or more qualifying dependents, and may claim the Lifetime Learning credit for the qualified tuition and related expenses incurred for himself.

In order to be eligible for the American Opportunity tax credit or the Lifetime Learning credit for a tax year, qualified tuition and related expenses must be paid during that tax year for education furnished during an academic period (e.g., semester) that starts within that tax year or within the first three months of the following year. Under this rule, taxpayers have a timing option. For example, for a semester beginning in Jan. of Year 2, a taxpayer may pay the expenses in Year 1 or Year 2. The credit will be available in whichever year the payment is made.

The Lifetime Learning credit is nonrefundable—i.e., it can reduce regular income taxes to zero but cannot result in the receipt of a refund. For 2009, the credit may be claimed against the alternative minimum tax (AMT).
The American Opportunity tax credit, on the other hand, is 40% refundable, which means that you can get a refund if the amount of the credit is greater than your tax liability. For example, someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government. In addition, the American Opportunity tax credit may be claimed against a taxpayer's AMT, in 2009 and 2010.

If the expenses on which the American Opportunity/Lifetime Learning credits are based are later refunded, the credits may have to be recaptured—i.e., the tax for the refund year may be increased to account for a recomputed credit for the earlier year.
As noted above, the American Opportunity/Lifetime Learning credits are based on the payment of qualified tuition and related expenses. These are the expenses for tuition and academic fees that are required for enrollment or attendance at an eligible educational institution. Qualified tuition and related expenses do not include student activity fees, athletic fees, insurance expenses, room and board, transportation costs and other personal living expenses. They also don't include the cost of any course or education involving sports, games, or hobbies unless the course or education is part of the student's degree program. Books are qualified expenses under the American Opportunity tax credit, but not the Lifetime Learning credit.
The amount of qualified tuition and related expenses taken into account in computing the American Opportunity/Lifetime Learning credits must be reduced by tax-exempt scholarships and fellowships, certain military benefits, and any other tax-exempt payments of those expenses other than gifts or bequests.

Both credits are phased out for higher income taxpayers. For 2009 and 2010, the American Opportunity tax credit is phased out for couples with income between $160,000 and $180,000, or singles with income between $80,000 and $90,000. The Lifetime Learning credit is phased out for couples with income between $100,000 and $120,000 for 2009 and 2010, or singles with income between $50,000 and $60,000. (The phase-out range for the Lifetime Learning credit is adjusted annually for inflation.)
Neither credit is available for taxpayers who are married filing separately.

In addition, neither credit is allowed to an individual who is claimed as a dependent on another's return. In this situation, the credits are allowed instead to the taxpayer claiming that individual as a dependent, and the credits are based on the total qualified tuition and related expenses paid both by the taxpayer and the student. But if no one claims the student as a dependent on a tax return for the year, the credits are allowed to the student on his or her own return, based on the expenses paid by the student. In either case, the student's credit takes into account the expenses that a third party (e.g., the student's grandparent) pays to the eligible educational institutional directly.

Eligibility for the credits is subject to a number of technical requirements not discussed above. Please give us a call if you would like to discuss your eligibility for these credits and how to claim them.
Energy CreditUnlike past efforts by Congress to use taxes to spur energy efficiency by homeowners, provisions in the recently enacted “American Recovery and Reinvestment Act of 2009” (the Act) are substantial. These include an increased credit of 30% of the cost of residential energy-efficient improvements such as more efficient furnaces, heat pumps and air conditioners, as well as energy-tight windows and more insulation, and a tripling of the maximum credit for a household to $1,500. Here are the details.

Individual taxpayers are allowed a personal tax credit, known as the non-business energy property credit, for energy efficient improvements to a dwelling unit in the U.S. owned and used by the taxpayer as the taxpayer's principal residence. Under pre-Act law, this credit was equal to the sum of:

10% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements (i.e., building envelope components meeting certain requirements) installed during the tax year, and
the amount of residential energy property expenditures (i.e., $50 for each advanced main air circulating fan, $150 for each qualified natural gas, propane, or oil furnace or hot water boiler, and $300 for qualified energy efficient property, including heat pumps, water heaters, and central air conditioners) paid or incurred by the taxpayer during the tax year.

The 10% credit rate is increased to 30%
The dollar limitations on residential energy property expenditures have been eliminated; instead, all energy property that was previously eligible for the $50, $150, and $300 credits is instead eligible for a 30% credit
The $500 lifetime cap ($200 for windows) is eliminated and replaced with an aggregate $1,500 cap for 2009 and 2010

We hope this information is helpful. If you would like more details about this or any other aspect of the new law, please do not hesitate to call.
Section 179Generally, the cost of property placed in service in a trade or business can't be deducted in the year it's placed in service if the property will be useful beyond the year. Instead, the cost is “capitalized” and depreciation deductions are allowed for the property, but are spread out over a period of years (a “cost recovery period”). Capitalization delays the tax benefits of business expenditures. For example, you may spend $50,000 on a new computer system today, but must spread your depreciation deductions over several years. That's why the election to take immediate deductions is valuable.

The expense election is made available, on a tax year by tax year basis, under Section 179 of the Internal Revenue Code (the “Code”), and is often referred to as the “Section 179 election” or the “Code Section 179 election.”

Subject to a dollar limit, the election allows you to deduct, in the tax year for which the election is made, the cost of qualifying property (described below) placed in service during the tax year. The immediate deductions allowed are in lieu of capitalization and later depreciation deductions. The deduction limit is $250,000 for tax years beginning in 2009 and $134,000 for tax years beginning in 2010. (Note that the deduction limit is scheduled to be greatly reduced for qualifying property placed in service in tax years beginning after 2010.) As discussed below, the deduction is phased out (i.e. gradually reduced) if (1) more than $800,000 of qualifying property is placed in service during tax years beginning in 2009, (2) more than $530,000 of qualifying property is placed in service during tax years beginning in 2010, or (3) taxable income from your trade or business is relatively low for the tax year. On the other hand, higher limits apply to certain property used in a qualified business in an empowerment zone or a renewal community.

Qualifying property: To qualify for the election, the property must be “tangible personal” property. This means that real estate (land, buildings, and their structural components) does not qualify, nor do intangibles such as patent rights. However, for tax years beginning before 2011, off-the-shelf computer software qualifies. Also, to qualify, property must be “purchased.” Thus, if you acquired the property in a tax-free exchange or from an individual or entity to which you bear a close relationship specified in the Code, the property does not qualify.

Dollar limit: The dollar limit doesn't mean the election can't be made for property costing more than that amount. For example, if you buy a machine for $255,000 and place it in service in a business in a tax year beginning in 2009, you can elect to immediately deduct $250,000 of its cost for that year. The remainder of the cost ($5,000) is capitalized and depreciated. Also, you can make the election for two or more separate assets, as long as the total cost covered by the election doesn't exceed the dollar limit for that year.

As mentioned above, if the total cost of qualifying property that you place in service during a tax year beginning in 2009 is over $800,000 (over $530,000 for a tax year beginning in 2010) (i.e. the “phaseout” amount), the immediate deduction limit is reduced by that extra amount. For example, if you place in service $810,000 of qualifying property in a tax year beginning in 2009, you can make the election for no more than $240,000 of property ($250,000 minus $10,000 [excess of $810,000 over $800,000]). (Note that the phaseout amount is scheduled to be greatly reduced for qualifying property placed in service in tax years beginning after 2010.)

You should also be aware that, in addition to liberalizing the expensing limits, legislation provides for additional first-year bonus depreciation of 50% of the adjusted basis of qualified property placed in service in 2009. Together, the increased expensing limits and the 50% additional first-year bonus depreciation allowance, both of which apply to property placed in service in 2009, provide a strong incentive to accelerate into tax years beginning in 2009 purchases of machinery and equipment being contemplated to be placed in service in later years.

Taxable income limit: Also, as mentioned above, if your taxable income from all of your trades or businesses is less than the dollar limit for that year, the amount for which you can make the election is limited to that taxable income. However, any amount you can't immediately deduct because of the taxable income limitation is carried forward and may be deducted in later years (to the extent that the applicable dollar limit, the phaseout rule and the taxable income limit permit).

Recapture: If you dispose of the property, or stop using it in a trade or business, before the end of the cost recovery period that would have applied to the property had you not made the election for the property, all or part of the amount of the deduction you claimed under the election must be taken back into income (“recaptured”). Exactly how much will depend on the type of property and how long you used the property in a trade or business.

The above information covers the essential elements of the Code Section 179 election. Clearly, many considerations go into each decision to acquire business assets, and many involve non-tax factors. However, the election should play a role; accelerated tax benefits may enable you to obtain the property you need earlier and at reduced after-tax costs.