Money Under 30 » Taxes

$6,500 Home Buyer Tax Credit

David Weliver — Thu, 05 Nov 2009 20:33:54 +0000

Good news for prospective home-buyers: It looks like Congress will extend the $8,000 first-time home buyer tax credit that was slated to end this month and add a $6,500 tax credit for those that have already owned a home.

The Senate voted 98-0 Wednesday to extend and expand the tax credit and the House could vote on the bill as early as today. If passed, the $8,000 tax credit would remain in effect for first-time home buyers — or anyone who hasn’t owned a home in the last three years.

Going to Buy? Get Mortgage Pre-Approval Online

Buyers who have owned their current homes at least five years would also now be eligible for tax credits of up to $6,500. To claim the credit, both groups of buyers would have to sign purchase agreements before April 30, 2010 and close before June 30. The tax credit would be extended until June 30, 2011 for servicemen and women serving overseas for at least 90 days.

The actual credit amount home buyers are eligible for is ten percent of their home purchase price up to a maximum of $8,000 for first-time home buyers and $6,500 for buyers who already own homes.

Who is Eligible for the Tax Credit?

To qualify for either credit, you must be purchasing a primary residence of less than $800,000 and cannot be purchasing the property from a direct relative.

You are eligible for the first-time home buyer tax credit if you:

Have never owned a home
Have not owned your primary residence for the last least three years

You are eligible for the $6,500 home buyer tax credit if you have lived in a home you own for five consecutive years out of the last eight years. Unfortunately, it does look like these new provisions still exclude some buyers from the credit. Buyers who have owned a home within the last three years, but did not own it for at least five years, cannot take the new credit.

Income Limits

The amount of the tax credit you can claim will be phased out for single taxpayers who earn more than $125,000 and joint taxpayers who earn more than $225,000.

Read More: How to Claim the $8,000 Home Buyer Tax Credit

$15,000 Home Buyer Tax Credit?

David Weliver — Mon, 21 Sep 2009 15:37:39 +0000

The $8,000 first-time home buyer tax credit program has been such a success, Washington is asking: Can we live without it? That credit is set to expire on December 1, 2009, but Sen. Johnny Isakson, (R-Ga.), has introduced legislation that would provide a $15,000 home buyer tax credit to any home buyer (not just first timers) who occupy the home they purchase for at least two years. Are you a prospective first-time home buyer? Here’s your gamble: Act quickly to take advantage of the $8,000 tax credit before it expires, or wait to see if the $15,000 home buyer tax credit becomes law.

Isakson’s proposed legislation would make available up to a $15,000 tax credit for any home buyer of any home over the next year. It would also remove the income limits that currently apply to the first-time home buyer tax credit. In a press release on the Senator’s Website, he says:

“If we do this, home values will return, unemployment will go down, our economy will turn, and consumer price confidence will go up. I would submit it is a part of the main solution we need to take an economy that is on the bottom and move it back toward equilibrium and prosperity for America.”

Another bill recently introduced would extend the $8,000 first-time home buyer tax credit for another six months. If this bill passes, first-time home buyers would have more time to claim the existing credit, although the rules would remain the same. (The tax credit would only apply to first-time home buyers and income caps would remain in place).

I predict that the first-time home buyer tax credit will be extended but Congress debates expanding the program to a $15,000 home buyer tax credit for a long time. If the expansion passes, I would bet it will include limitations (or even be for less than $15,000). What do you think? Is expanding the credit a good idea, or has the first-time home buyer tax credit run its course?

PS: If you’re looking for answers on the existing tax credit, visit my FAQ on the first-time home buyer tax credit or brief guide on how to buy your first home.

Cash-for-Clunkers Bill Could Offer $4,500 for Your Old Car

David Weliver — Thu, 11 Jun 2009 11:30:54 +0000

My father drives an old Lincoln town car that has over 300,000 miles on it. That’s right, 300,000. Not only does he drive it, but he commutes over 90 miles each way in it, every day. Everybody who knows him thinks he should have gotten a new car oh, about 100,000 miles ago. But my dad is fanatically frugal and, perhaps more importantly, he simply likes his car. He’s determined to drive that old Lincoln until it simply doesn’t want to drive anymore. Unless the so-called “cash-for-clunkers” bill becomes law. The bill (which the House passed it today) could offer drivers like my dad up to $4,500 towards a new, more fuel-efficient ride. What’s the cash-for-clunkers bill all about? And could you benefit?

The cash-for-clunkers bill would give a $4,500 credit to anybody who trades in an old car for a new(er) vehicle that gets at least ten miles per gallon more, or a $3,500 credit for new cars that get between four and up to 10 MPG better fuel economy. According to the current version of the bill, to qualify, the trade-in vehicle must be model year 1985 or newer, be drivable, and must be destroyed upon trade-in (it cannot be resold). Additionally, the new car purchased must get at least 22 MPG or, if it is a light-duty truck, at least 18 MPG.

Obviously, the cash-for-clunkers bill is intended to eliminate less fuel efficient cars and create an incentive to buy a car (and presumably give a boost to the flagging auto industry). Critics of the bill say that we’re over-incentive people to spend money in certain struggling industries (this program would be akin to the $8,000 first-time home buyer tax credit designed to stimulate the housing market).

Personally, I think the cash-for-clunkers bill is a great idea. (And not just because I want to see my dad get some new wheels!) Even if the economy (and auto industry, in particular) weren’t in such dire straights, I believe it’s partially our government’s responsibility to begin to find ways to reduce our dependence on oil. Although moving towards more fuel-efficient vehicles isn’t a big a step as, say, developing alternatives to fossil fuels; it’s a start. Plus, this bill pushes for greater fuel efficiency in a model that is true to our free-market economy: Drive a more fuel-efficient car, get a financial incentive. Makes sense to me.

What do you think about the cash-for-clunkers bill? A good idea or too much government involvement? Would you take advantage of the incentive? Let us know!

There's Still Time to Get $8,000 Towards Your First Home

David Weliver — Tue, 19 May 2009 14:45:27 +0000

I think the $8,000 first time home buyer tax credit is one of the greatest financial opportunities young people have going these days. Unfortunately, unless Congress extends it past December 1, 2009, it won’t be around for long.

If you’re considering buying your first home this year, remember that if you qualify for this tax credit, your new home may as well have an “$8,000 off!” sticker hanging on it. To continue to help prospective home buyers navigate this opportunity, I recently completed a page featuring first time home buyer tax credit frequently asked questions. I invite you to check it out.

If you have other questions, leave them in a comment on this post or my original posts on the $8,000 tax credit and how to claim the tax credit.

Ever Wondered What Happens If You Don't a File Federal Tax Return?

David Weliver — Wed, 15 Apr 2009 20:11:58 +0000

Happy Tax Day! That’s right it’s April 15th, and hopefully you’ve already put last year’s tax return to bed. If not, you still have a few hours left to file your return or an extension (here’s a link to TurboTax Free Edition for those who really need it!) But just in case you’re considering trying to dodge filing a tax return (or paying Uncle Sam), here a few reasons to think again.

GoodFinancialCents has one of the best descriptions of what happens if you don’t file a tax return. To sum it all up, if you don’t file a federal tax return, you’ll end up owing the government a lot more in penalties and interest. Of course, if you’re caught intentionally evading taxes or defrauding the IRS, you could also get jail time.

Most late filers or payers, however, will face:

Interest. The IRS charges interest on any amount of unpaid taxes you owe whether you’ve filed a return or not. The interest rate is the federal short-term rate plus three percent, compounded daily.
Penalties. In addition to the interest that you’ll owe for every month you don’t pay, penalties accrue on any amount you owe the IRS at a rate of 5% per month (or partial month) past the deadline that you don’t file (up to a 25% maximum). That’s 5% interest per month! If the penalty weren’t capped at 25% and the interest were compounded, that would be the equivalent of an 80% annual interest rate. Ouch! If you file but don’t pay up, interest accrues at the much lower rate of 0.5% per month (or partial month) that the bill goes unpaid (equivalent to about a 6.17% annual rate). The lesson? File your return even if you can’t pay the taxes you owe right away.

If you have been skipping out on paying taxes (or filing tax returns) for an extended period of time, you have to assume the IRS will find you eventually. In that case, it’s far better to suck it up and approach them before they find you. Doing so will help you avoid criminal prosecution and may dramatically reduce any amounts you owe.

How to File for a Tax Extension

David Weliver — Thu, 09 Apr 2009 15:16:51 +0000

Taxes are due in just a week (April 15th). Do you need to request an extension to file your federal income tax return? Filing an individual federal tax extension is easy if you know what you’re doing.

Filing a tax extension gives you an additional six months (until October 15th) to file your federal tax return. It does not, however, give you additional time to pay any taxes you owe (they’re still due on April 15th). If you owe taxes but still need to file an extension, you should pay the IRS your best guess of what you owe them by April 15th to minimize any penalties and interest you’ll owe.

If you can’t pay your full tax bill, you can request a payment plan from the IRS.

How to File for a Tax Extension

To file for a tax extension, simply complete IRS Form 4868 and mail it to the IRS before April 15th. You can read more about filing for an extension at the IRS site.

Why File a Tax Extension?

If you have all of your tax documents in order and expect to get a refund from the IRS, you generally should not file a tax extension. File by the deadline and get your money back! Filing for a tax extension may be appropriate, however, if:

You are missing important tax documents such as W-2s or 1099s
You have unanswered tax questions that could make a big difference in how much you owe
You want to reduce your risk of an audit

That last one may take you by surprise, but there is some evidence that filing your tax return as late as possible may reduce your risk of an audit, at least slightly. This is especially true for small businesses and anybody who files a schedule C (including freelancers), as these groups are typically more at risk for an audit to begin with.

What Happens If You Owe Taxes and Can't Pay?

David Weliver — Mon, 30 Mar 2009 15:17:16 +0000

For many Americans, tax-time means a refund check. But others may owe Uncle Sam a big chunk of change. Happened to you? You’ll want to make quarterly estimated tax payments this year so it doesn’t happen again. But what if you owe the IRS but don’t have the money now? (Hint: You can’t just file an extension until you have the money to pay).

Although it’s easy to request an extension to file your federal income tax return, you still must pay any taxes owed by April 15th or face additional penalties and interest. If you owe the IRS but can’t pay now, you still need to file your tax return and then file a request for an installment agreement using IRS Form 9465 or online via the IRS online payment agreement (OPA) application.

IRS Installment Agreement

An IRS Installment Agreement is essentially a loan from the government to repay back taxes over a period of no longer than three years. There’s a fee to enroll in the agreement of $105 or $52 if you sign up for automatic checking account withdrawals. (You can avoid the fee if you can pay the total amount due in 120 days or less.) Plus, you’ll be charged interest equal to the federal short-term interest rate plus 3%.

The IRS will generally accept your installment agreement if you owe $25,000 or less in taxes. If you owe more than $25k or cannot even make the payments required of a full installment agreement, you’ll need to request a partial payment agreement and will most likely need to enroll the help of an accountant or attorney experienced with tax debt.

Avoid Paying Taxes With Credit Cards

The IRS tells you—even encourages you—to pay any taxes owed with a credit card. (They would rather get their money now than over time). But paying taxes with a credit card is expensive. Not only will you pay a much higher interest rate on a credit card than with an installment agreement, there is a fee of 2-3% for paying taxes by card.

Even a great rewards program won’t make up for that fee. The one exception is if you have a 0% APR offer on a credit card. Then you can save money by paying the fee in lieu of interest on an installment agreement. Still, I’d rather make a fixed monthly payment at a low interest rate than carry a balance on a credit card—even at 0%.

How to Avoid an IRS Audit

David Weliver — Thu, 05 Mar 2009 12:00:13 +0000

Around tax time, the mere utterance of the “A” word is enough to make even the most honest taxpayers break into a cold sweat. Tax codes are so complicated, and the IRS so stringent, that an auditor could probably find an error or two in almost anybody’s return. But don’t sweat; understanding how the IRS selects tax returns to audits may just decrease your chances of being selected.

Audit Risk Factors

The IRS selects the majority of tax returns to audit in one of two ways—either by noticing something on your tax return that sets off a “red flag” or by random. (In addition to “red flag” returns, a certain number of returns are audited at random every year—no way to avoid that one). You can, however, take steps to avoid having your return flagged for an audit.

The IRS uses a complex, top-secret algorithm called the DIF Score to select returns that have the highest potential of producing additional tax revenue in an audit. (Remember, they’re not just checking in on you to make sure you’re playing fair; they’re checking in to see if they can get more money out of you)!’

The formula compares your tax return to average returns for your occupation, age, income, and geographic location, and any major deviations could make you stand out. For example, if you reported an income of $40,000 and $12,000 in donations to charity, while most people in your income bracket deduct about $200 for donations, you stand a good chance of triggering an audit. Low-income filers who live in high-income zip codes may also be at risk.

In addition to the DIF score, certain categories of taxpayers may have a higher audit risk. This includes:

Freelancers and the self-employed
Workers with cash income (e.g., waiters)
Taxpayers using offshore banks and credit cards (no-brainer there)
High income filers

How to Protect Yourself

An audit is nothing to worry about if you’ve been honest on your tax returns and have the proof. If you did make $12,000 in charitable contributions, by all means deduct it as long as you have receipts to prove it. The same goes for business/self-employment deductions and personal deductions. Also, if you have an extremely large or unusual deduction, provide a written note or explanation with your return—humans don’t look at every tax return, but they will if there’s a red flag, and a simple note of explanation may be enough to preempt any excess scrutiny.

Finally, some suggest that the later you file, the less likely your return will be selected for an audit. If you are not worried about an audit and are expected a refund, file your taxes as soon as you can. If you are worried about your audit risk, and/or owe any taxes, do not file before the April 15th deadline. Some filers even file an extension every year to reduce their audit risk. (If you do file an extension, remember that you must still pay any taxes due on April 15 or face interest and penalties).

Still need to file your taxes? Prepare and file your federal tax return for free with TurboTax Federal Free Edition.

How to Claim the $8,000 Homebuyer Tax Credit

David Weliver — Sat, 21 Feb 2009 15:34:20 +0000

If you will be able to claim the $8,000 first-time homebuyer tax credit this year or next, here’s some helpful information. A recently released revision to IRS Form 5405 will help you through the steps required to claim the credit. Here’s some more information that will help:

Can You Claim the $8,000 Homebuyer Tax Credit?

In most cases, you can claim the tax credit if you purchased a home in the U.S. that will be your primary residence and close on the home between April 8, 2008 and before December 1, 2009 (or occupy the home for the first time if you built it). To qualify, you or your spouse must not have owned any other home within three years before purchasing the qualifying home.

Who can’t claim the credit? You will not be eligible for the $8,000 first time homebuyer credit if your modified adjusted gross income is more than $95,000 (single) or $170,000 (married). You also cannot claim the credit if you received the home as a gift or through inheritance or you purchased it form a relative.

More About the $8,000 Homebuyer Tax Credit

If you purchased your home in 2008, the credit must be repaid through your taxes over the next 15 years. It’s essentially an interest-free loan. If you move within 15 years, you will owe the balance due on your taxes the year that you move.
If you purchased your home in 2009, you will not need to repay the tax credit if you reside in your home for at least three years from the purchase date. Again, if you move before the three years are up, you will have to repay the credit.

“But It’s Not Fair”

I have already received hundreds of comments about this tax credit on this blog, many of which complain that it’s not fair that some people will get $8,000 outright and others only get an interest-free $8,000 loan. It may not be fair, but remember what this tax credit is for: It’s to encourage people to buy a home for the first time in a recession and risky real estate market. It’s not to reward people who already purchased. It’s to encourage people to buy who might otherwise hold off several years. When offering a $7,500 interest free loan didn’t get the desired results, the government upped the ante by offering $8,000 outright.

I hate to use this analogy, but complaining that you got an interest free loan when others got a credit they don’t have to repay is a bit like you’re playing Deal or No Deal. Imagine you take an offer only to discover that your case is worth more. You didn’t know you had more in your case, and you risked not getting anything. At the end, you still got something you didn’t have before. So please, try to be happy with that!

$400 or $800 Making Work Pay Tax Credit

David Weliver — Fri, 20 Feb 2009 20:20:34 +0000

Bundled in the 2009 economic stimulus plan is the $400 ($800 for couples) Making Work Pay tax credit that will provide a tax credit in 2009 and 2010 equal to 6.2 percent of your earned income up to a maximum of $400 for individual filers and $800 for couples. Here’s what you need to know.

The $400/$800 Making Work Pay tax credit could take effect as soon as July 1, 2009, meaning workers will begin seeing a decrease in the federal income taxes withheld from each paycheck by about $30 per paycheck every two weeks or $60 for couples. If you are self-employed, you can claim the credit when you file your 2009 taxes next April or reduce each of your 2009 quarterly estimated tax payments by $100.

The credit will phase out by two percent of any income over $150,000 for couples and $75,000 for others. Couples earning more than $190,000 and individuals earning more than $95,000 will not benefit from the credit.

Unlike the 2008 economic stimulus tax rebate checks that were mailed to taxpayers in a lump sum, the government is hoping that offering the $400 Make Work Pay tax credit as a reduction in payroll deductions will encourage taxpayers to spend the credit rather than save the money or use it to pay down debt.

According to some estimates, the Making Work Pay tax credit will cost the U.S. government $116.2 billion over 10 years, making it the largest tax provision in the 2009 stimulus plan.