TAX CREDITS

The “American Recovery and Reinvestment Act of 2009” (the 2009 Economic Stimulus Act) expanded the residential energy improvement credit for 2009 and 2010 (this credit was last available in 2007) and extended and expanded the tax credit for residential solar and fuel cell equipment through 2016.  This gives taxpayers who want to “go green” a chance to offset some of the cost of going green with tax credits.  

These are two distinctly different credits with different requirements and limitations.  The following is an overview of these credits. However, you are strongly urged to contact this office before entering into any contractual arrangements to install any of these energy items to first verify what your tax benefit might be.

• Tax Credit for Residential Energy Improvements - Energy improvements to a principal residence located in the United States and placed in service during 2009 and 2010 qualify for the residential energy improvements credit. The credit is 30% of the cost of:

o Qualified advanced main air circulating fan;
o Qualified natural gas, propane, or oil furnace;
o Qualified natural gas, propane, or oil hot water boiler;
o Qualified energy efficient heat pumps;
o Qualified energy efficient water heaters;
o Qualified energy efficient central air conditioners;
o Qualifying insulation;
o Qualified exterior windows including skylights;
o Qualified exterior doors;
o Qualified metal roofs coated with heat-reduction pigments; and
o Qualified asphalt roofing with appropriate cooling granules. 

• Tax Credit for Residential Energy Efficient Property (REEP credit) – The “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act) removed the credit caps for certain equipment.  The caps reaming are noted.   A 30% credit applies to the following items placed in service after 2008 and before the end of 2016:

o Qualified solar water heaters; 
o Residential solar electric systems;    
o Fuel cell equipment – with a maximum credit of $500 for each half-kilowatt of capacity;
o Qualified wind energy equipment; and
o Qualified geothermal energy equipment

Labor costs for onsite installation and for piping and wiring connections are qualifying costs for these credits.  However, the credits do not apply to equipment used to heat swimming pools or hot tubs. 

Credit limitations – Although these credits can be used to offset both the regular tax and AMT, they are nonrefundable personal credits that can only reduce a taxpayer’s tax to zero, and any remaining balance is not refundable.  If the amount of the credit for the residential energy efficient property credit (REEP - i.e., the credit for residential solar and fuel cell equipment and wind/geothermal energy equipment) exceeds the taxpayer’s tax after subtracting other nonrefundable personal credits, the excess can be carried to the next tax year and is added to that year’s allowable credit.

“Making Work Pay” credit provides a refundable credit of 6.2% of a taxpayer’s earned income not to exceed $400 for individuals and $800 for joint filing couples. 

Eligible individuals will receive an income tax credit for two years (tax years beginning in 2009 and 2010). This credit reduces an individual’s tax liability on a dollar-for-dollar basis. Any excess over a taxpayer’s tax liability will be funded.  Nonresident aliens, estates, trusts, or individuals who can be claimed as a dependent on someone else's return do not qualify for this credit.

The credit is the lesser of:

• 6.2% of an individual's earned income or
• $400 ($800 in the case of a joint return).

Example - For individuals with earned income above about $6,451, the credit maxes out at $400 ($6,451 x .062).  For married couples filing jointly with earned income above $12,902, the credit maxes out at $800 ($12,902 x .062). Thus, the credit for individuals above those income amounts will receive the maximum credit, while those below will receive a reduced credit.

Unlike the 2008 stimulus rebate, this credit will not be paid out in a lump sum.  For taxpayers who receive a paycheck, the credit will automatically show up in their paychecks as reduced withholding. For others, such as self-employed individuals, the credit can be claimed on their 2009 and 2010 tax returns when they are filed.

This credit phases out at the rate of 2% of modified AGI, starting at $75,000 for individuals and $150,000 for joint filers.  It is fully phased out at $95,000 for individuals and $190,000 for joint filers. 

If you have multiple employers, or you are married and your spouse is also employed, the reduced withholding may well exceed the credit amount and reduce your anticipated refund.

EITC is a refundable tax credit that rewards lower-income individuals for working.  The credit, based upon the amount of the individual’s earned income, is determined through a complicated computation, where the credit increases until the earned income reaches a predetermined apex and then begins to decrease as the amount of earned income increases.  As a result, the credit becomes zero when the taxpayer is no longer considered a low-income individual.  The amount of the credit is based upon the number of the taxpayer’s qualifying children.  Each year, the credit and income limits are adjusted for inflation. The amounts for 2009 are used in this article. If a taxpayer qualifies, it could be worth up to $5,637 for 2009. So a taxpayer will pay less federal tax or even get a larger refund.

The EIC, generally, is computed by multiplying the specified credit percentage by the individual's earned income, up to a maximum earned income dollar amount (which is adjusted for inflation) for the tax year. The credit percentage and the earned income amount, and therefore the maximum EIC, depend on the number of “qualifying children” the taxpayer has.  For 2009, the maximum amounts are:

Qualifying       Credit         Earned income    Maximum
children        percentage      amount               credit
----------           --------------     --------------       --------------
None                 7.65%           $5,970             $457
One                     34%             $8,950             $3,043
Two                    40%             $12,570           $5,028
Three or more  45%             $12,570           $5,657(1)

(1) The category, applicable only to 2009 and 2010, is included as a provision of the “American Recovery and Reinvestment Act of 2009” (the 2009 Economic Stimulus Act).

Based on statistics from the IRS, in 2005, over 22 million taxpayers received $41.4 billion dollars in EIC.  The IRS estimates 20 to 25% percent of people who qualify for the credit do not claim it.

At the same time, there are millions of Americans who have claimed the credit in error, many of whom simply don’t understand the criteria.

If you were employed for at least part of 2009, you may be eligible for the EITC based on these general requirements:

• You earned less than $13,440 ($16,560 if married filing jointly) and did not have any qualifying children.

• You earned less than $35,463 ($38,583 if married filing jointly) and have one qualifying child.

• You earned less than $40,295 ($43,415 if married filing jointly) and have more than one qualifying child.

In addition, you must meet a few basic rules:

• You (and spouse and qualifying child, if applicable) must have a valid Social Security Number.

• You must have earned income from employment or from self-employment.

• Your filing status cannot be married, filing separately.

• You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.

• You cannot be a qualifying child of another person.

• If you do not have a qualifying child, you must:
 
- be age 25 but under 65 at the end of the year,
- live in the United States for more than half the year, and
- not qualify as a dependent of another person.

• You cannot file Form 2555 or 2555-EZ (related to foreign earned income).

• Your investment income, such as dividends and interest, must be $3,100 or less for 2009.

Special Military Provision - Members of the military can elect to treat all or none their nontaxable combat pay as earned income for purposes of computing the earned income credit.  The method providing the largest EITC benefit can be used. 

If you have questions about how the EITC might apply to you, a family member or even a friend, please call this office for additional information.  It is also important to understand that a taxpayer who might not normally be required to file a return might benefit from filing to claim the EITC.

Taxpayers who have a qualified child may qualify for the Child Tax Credit.  The maximum credit amount is $1,000 through 2010 and then will drop to $500 beginning in 2011.  

The “American Recovery and Reinvestment Act of 2009” (the 2009 Economic Stimulus Act) made some significant changes to this credit for 2009 and 2010.  Taxpayers with “earned” (not investment) income whose child credit exceeds their regular and alternative minimum taxes are eligible for a refundable credit. This credit is 15% of the taxpayer’s earned income in excess of a threshold amount, which was to be $12,550 for 2009. However, for 2009 and 2010, the threshold amount has been reduced to $3,000, potentially expanding the number of taxpayers (particularly those with earned income less than $12,550) who may qualify for the refundable portion of the credit.

A qualifying child for purposes of this credit is a child who:

(1) Is the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, a grandchild);
(2) Was under age 17 at the end of the tax year;
(3) Did not provide over half of his or her own support for the tax year;
(4) Lived with the taxpayer for more than half of the tax year; and
(5) Was a U.S. citizen, a U.S. national, or a resident of the United States.

For 2009 and later years, the qualifying child must also be the taxpayer’s dependent.

As with most tax benefits, the child tax credit begins to phases out when a taxpayer’s income reaches certain specified threshold amounts.  The threshold amounts are $110,000 for married taxpayers, $55,000 for married taxpayers filing separately and $75,000 for all others.  The phase-out amount is $50 for each $1,000 (or fraction) of income in excess for the phase-out threshold.  

In addition to being limited due to the AGI phase out, the child tax credit is also limited for most taxpayers by the taxpayer’s total tax liability (both regular and AMT).  However, when the credit is limited by the amount of tax liability, a portion of the credit may be refundable for certain taxpayers (see below).  The child tax credit can be used to offset AMT only through 2010.

Taxpayers who are unable to claim the full amount of the child tax credit because their income tax liability is less than the credit amount may qualify to take a portion of the tax credit as a refundable credit.  This refundable “additional” credit is limited to lower-income taxpayers and involves a rather complicated computation to determine the amount that is refundable.

Special Benefit - Military - Excluded combat zone pay of military taxpayers is treated as earned income for purposes of the computation of the refundable portion of the credit.

A nonrefundable tax credit is available to some taxpayers for the expenses incurred for the care of a child (generally under 13 years of age), disabled child, spouse, or other dependent while the taxpayer is gainfully employed, (or is job seeking).  In addition, employer dependent care assistance programs allow employees to exclude from income certain payments expended for child and dependent care.  

Generally, the credit is 20% of the cost of the care with a maximum expense limit of $3,000 for one child and $6,000 for two or more.  However, for lower-income taxpayers, the credit percentage can be as high as 35%.  The expenses that are taken into account for the credit are limited to a taxpayer’s earned income (i.e., income from working).

The limit must be reduced by the amount a taxpayer excludes from gross income under an employer-provided dependent care assistance plan.  For taxpayers who file joint returns, the expense is limited to the earned income of the lower paid spouse.  Generally, self-employed taxpayers use the net earnings on Schedule C as earned income.  

The rules for qualifying for this credit are somewhat complicated and the following are some of more frequently encountered issues:

Qualifying Person Test - Your child and dependent care expenses must be for the care of one or more qualifying persons.  A qualifying person is:

1. Your qualifying child who is generally your dependent and who was under age 13 when the care was provided, or 

2. Your spouse who was physically or mentally not able to care for him or herself and lived with you for more than half the year, or

3.  A person who was physically or mentally not able to care for him or herself, lived with you for more than half the year, and either:

a. Was your dependent, or

b. Would have been your dependent except that:

i.  he or she received gross income of $3,650 (2009 and 2010) or more,
ii. he or she filed a joint return, or
iii. you, or your spouse if filing jointly, could be claimed as a dependent on someone else’s return.

Work-Related Expense Test - Child and dependent care expenses must be work-related to qualify for the credit.  Expenses are considered work-related only if both of the following are true.

• They allow you (and your spouse if you are married) to work or look for work.

• They are for a qualifying person’s care.

Special Situations

• Kindergarten – Generally, the cost of school (including private schools) from kindergarten and up are considered schooling, which does not count as a qualified expense.  However, after school care generally qualifies if its cost is stated separately.

• Summer School, Day Camp - Costs of summer school and tutoring programs are not qualifying employment-related expenses because they are educational in nature.  A day camp or similar program may constitute a qualifying employment-related expense, even though the camp specializes in a particular activity, such as soccer or computers.  The full amount paid for an education day camp that focuses on reading, math, writing, and study skills may be a qualifying expense.  No portion of the cost of an overnight camp is an employment-related expense.

• Absent from Work - A taxpayer must allocate the cost of care on a daily basis if expenses are paid during a period in which a taxpayer is not employed or in active search of employment.  However, for short temporary absences (generally two consecutive calendar weeks) where the taxpayer is required to pay for the care, the expenses may be counted.

• Medical or Maternity Leave - Cost of care while a taxpayer is on short- or long-term disability leave under the Family Medical Leave Act, paid medical leave, or paid maternity leave are not employment-related expenses.

• Special Rule for Children of Separated or Divorced Parents - In the case of a child of divorced or separated parents, only the custodial parent may claim the credit, even if the non-custodial parent may claim the dependency exemption for that child.  A custodial parent is the parent with whom a child shares the same principal place of abode for the greater portion of the calendar year.

• Disabled or a Full-Time Student Spouse - For taxpayers who file joint returns, the expense is limited to the earned income of the lower paid spouse.  If the spouse is disabled or a full-time student, he or she generally will not have earned income.  In this circumstance, the spouse’s income is imputed for each month he or she is disabled or a full-time student.  The imputed amounts are $250 where there is one qualifying person and $500 where there are two.  If both spouses were full-time students or disabled (and not working) in any given month, then only one can be considered to have the imputed income for that month.  A part of a month is treated as a whole month.

• Care Provided in Taxpayer’s Home – If the care services are provided in the taxpayer’s home, the care provider would be considered the taxpayer’s household employee and the household employee rules may apply.

• Provider’s Tax ID Information – To claim the credit, a taxpayer must include the care provider’s name, address and tax ID number on the return when filing for the credit.  It is recommended that
IRS Form W-10 is used when obtaining the information.  The form includes a place for the provider to sign.

This credit can be complicated and not all the details about the credit are included in the article.  If you have questions about whether or not you qualify for the credit, please call this office.

Adoptive parents may be able to claim a dollar-for-dollar tax credit for the “qualified” expenses of adopting a child up to $12,170 for 2010 ($12,150 for 2009) for each adopted child.  That is equivalent to a deduction of over $48,500 for a taxpayer in the 25% tax bracket.  The credit is nonrefundable and cannot exceed the sum of a taxpayer’s regular and alternative minimum taxes.  However, any unused credit can be carried forward up to 5 years.

In addition, if the taxpayer’s employer has an adoption assistance program, he or she may be able to exclude from his or her adjusted gross income up to $12,170 for 2010 ($12,150 for 2009) of qualified adoption expenses paid by an employer. Both the credit and the exclusion can be claimed but not for the same expenses.

The credit is phased out if the taxpayer's income (modified AGI) exceeds the inflation adjusted threshold amount and is fully eliminated when the AGI reaches the threshold cap. These values are annually adjusted for inflation.  For 2010, the threshold income is $182,250 ($182,180 for 2009) and the threshold cap is $222,520 ($222,180 in 2009). The credit is subject to a limit based on tax, but an unused credit can be carried over for up to 5 years.  

Married taxpayers can claim the credit only on a joint return, unless the taxpayers are legally separated or have lived apart for the last six months of the tax year.

Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to the legal adoption of an “eligible child.”  However, the expenses do not include those to adopt a spouse’s child, surrogate mother expenses, or adoption arrangements that are in violation of state or federal laws.  Expenses in connection with an unsuccessful attempt to adopt an eligible child before successfully finalizing the adoption of another child can qualify.  Expenses connected with a foreign adoption can only qualify if the child is actually adopted.

An “eligible child” is a child under the age of 18 at the time the qualified adoption expense is paid.  If the child turned 18 during the year, the child is an eligible child for the part of the year he or she is under age 18.  A person who is physically or mentally incapable of caring for him or herself is also eligible, regardless of age.

There are additional rules related to adopting “special needs” children.  Please call this office if you have questions regarding “special needs” adoptions or additional questions of how the adoption credit will affect your unique circumstances.

Employers can qualify for a tax credit for qualified wages paid to members of targeted groups.  The credit, except for long-term family assistance recipients and summer youth employees, equals 40% (25% for employment of 400 hours or less) of qualified first-year wages ($6,000 cap) for a maximum credit of $2,400 for each eligible employee.

The Work Opportunity Tax Credit (WOTC) is available on an elective basis for employers hiring individuals from one or more of specified targeted groups. The amount of the credit available to an employer is determined by the amount of qualified wages paid by the employer.  Generally, qualified wages consist of wages for services rendered by a member of a targeted group during the one-year period beginning with the day the individual begins work for the employer.

The following are some significant changes to this credit created by the “American Recovery and Reinvestment Act of 2009” (the 2009 Economic Stimulus Act) and the 2007 Small Business and Work Opportunity Tax Act: 

American Recovery and Reinvestment Act of 2009 - For employment beginning in 2009 and 2010, wages paid to two new targeted groups – unemployed veterans and disconnected youth – count towards the credit.  An individual will qualify as an unemployed veteran if they were discharged or released from active duty from the Armed Forces during the five-year period prior to hiring, served on active duty for more than 180 days or was released from active duty due to a service-connected disability, and received unemployment compensation for not less than four weeks during the year before being hired.  An individual qualifies as a disconnected youth if they are between the ages of 16 and 25 and have not been regularly employed or attended school in the past 6 months.

2007 Small Business and Work Opportunity Tax Act:

• AMT - The WOTC will offset the Alternative Minimum Tax (AMT).

• Extended by 44 Months - The WOTC is extended by 44 months to Aug. 31, 2011 for most targeted groups.  Historically, this credit has been renewed by Congress on a temporary or year-by-year basis, and had been scheduled to expire at the end of 2007.  More employers may now take advantage of the credit, because they will have more time to include the targeted hirees in their strategic planning.  It is effective for individuals who begin work for the employer after May 25, 2007.

• High-Risk Youth WOTC - The WOTC requirements are eased for so-called “high-risk youths” who begin work for the employer after May 25, 2007.  These changes should especially benefit employers in “rural renewal counties,” which are counties outside of metropolitan areas that had a net population loss in the 1990s.

(1) Substitutes “designated community residents” for “high-risk youths” as a “targeted group,”

(2)  Substitutes a definition of a designated community resident for the definition of a high-risk youth by providing that a “designated community resident” is an individual who is certified by the designated local agency as having attained age 18 but not age 40 on the hiring date, and as having his principal place of abode within an empowerment zone, enterprise zone, renewal community or rural renewal county and

(3)  For a designated community resident, wages that qualify for the WOTC don’t include wages paid or incurred for services performed while the individual’s principal place of abode is outside an empowerment zone, enterprise community, renewal community or rural renewal county.

• Expanded “Ticket to Work” - A provision expanding the WOTC to cover “Ticket to Work” plan participants is effective for individuals who begin work for the employer after May 25, 2007.  The Act adds, as a third qualifying format, an individual work plan developed and implemented by an employment network with respect to which the requirements of the Social Security Act are met.

• Disabled Veterans - The WOTC is enhanced for employing certain disabled veterans who begin work for the employer after May 25, 2007.  The Act provides that a “qualified veteran” is an individual who is a veteran and is certified by the designated local agency as:

(1) Meeting the Food Stamp requirement, or

(2) Entitled to compensation for a service-connected disability, and

o Having a hiring date that isn’t more than one year after having been discharged or released from active duty in the U.S. Armed Forces, or

o Having aggregate periods of unemployment during the one-year period ending on the hiring date that equal or exceed six months (the compensation-for-disability requirement).

Current Targeted Groups – An employee is a member of a targeted group if he or she is a:

• Hurricane Katrina employee,
• Long-term family assistance recipient hired after December 31, 2006,
• Qualified recipient of Temporary Assistance for Needy Families (TANF),
• Qualified veteran,
• Qualified ex-felon,
• Designated community resident,
• Vocational rehabilitation referral,
• Summer youth employee,
• Food stamp recipient,
• SSI recipient,
• Unemployed veteran or 
• Disconnected youth.
The employer must request and be issued a certification from the state employment security agency for each employee for whom a credit is claimed.

If you are employing individuals who fall into any of these targeted groups, please check with this office for more details on the qualification and certification requirements if you are interested in claiming this credit.

The Alternative Minimum Tax Credit is a frequently misunderstood and overlooked tax credit.  Oversimplified, the alternative minimum tax credit is the result of incurring an alternative minimum tax (AMT) in a prior year, which generates a credit that can be used to offset the excess of the taxpayer’s regular tax over the alternative minimum tax in a subsequent year, with unused credit carried forward to future years.    

It doesn’t mean that you will have an AMT credit just because you were affected by the AMT.  The credit is the result of having an AMT adjustment known as a “deferral item of preference.”  Sound complicated?  It can be, but generally the deferral item that affects most taxpayers is the result of exercising a qualified stock option (frequently referred to as an Incentive Stock Option or ISO).  Roughly speaking, the credit amount is the difference between the AMT computed with and without the deferral item of preference. 

Refundable Minimum Tax Credit Provision - If you were unfortunate enough to have been affected by the alternative minimum tax (AMT) in a prior year, then you may have a carryover of unused minimum tax credit.  This primarily applies to taxpayers who exercised qualified (incentive) stock options and held the stock to qualify for long-term capital gains.  Up till now, the prior year AMT credit could only be used to the extent that the regular tax exceeded the AMT for the current year.  That, in effect, made the credit useless for taxpayers who are perpetually taxed by the AMT.

A provision that took effect in 2007 allowed taxpayers to use a portion of the taxpayer’s minimum tax credit carryover that is attributable to the 4th prior year or older (long-term unused minimum tax credit) in the current year, even if taxed by the AMT in the current year.

However, beginning in 2008, the law was changed yet again, essentially allowing a taxpayer to deduct up to 50% of their long-term AMT credit carryover in 2008 and the other 50% in 2009.  Prior to this change and for purposes of claiming the long-term unused minimum tax credit, the refundable credit amount was limited to the greatest of (1) $5,000, (2) 20% of the long-term carryover or (3) the AMT refundable credit amount (if any) for the prior year– before any reduction by reason of AGI.  Under the Act, the $5,000 limitation has been removed, and the 20% limit has been increased to 50%.  This effectively allows taxpayers with existing long-term unused credits to utilize the entire amount of the unused credit in 2008 and 2009.

In addition, the Act provides for abatement of any underpayment of tax outstanding on October 3, 2008 which is attributable to AMT on incentive stock options for any taxable year ending before January 1, 2008.  The abatement extends to any related interest or penalty. Any penalties and interest previously paid is added to the long-term AMT credit carryover and thus refunded as part of the credit in 2008 and 2009.

To stimulate home sales, Congress first established the first-time homebuyer credit in 2008, then modified it for 2009 (through November 30, 2009), and then extended it again through the middle of 2010 (2011 for certain service members) resulting in some complicated rules.

There are basically two credits, with significantly different sets of rules for each.  In addition, the extension legislation passed in November of 2009 added a new category of home buyer referred to as “long-time residents” and special provisions for U.S. Service Members.  The following is only an overview of these credits and you are encouraged to call this office in advance of a purchase to insure you will qualify for the credit.

2009 -2010 CREDIT HIGHLIGHTS:

• Credit Amount – The credit amount is based upon whether the buyer is a “first-time homebuyer” or a “long-time resident.”  See definition for both below.  The credit is 10% of the purchase price with a maximum credit of $8,000 ($4,000 for those filing married separate) for “first-time homebuyers” or $6,500 ($3,250 if married filing separate) for “long-time residents.” 

• Repayment Required: If the home is sold or ceases to be the taxpayer’s principal residence within 36 months of its purchase

• Purchased: Between January 1, 2009 and before May 1, 2010 (July 1, 2010 if the taxpayer had entered into a binding contract before May 1, 2010.  Note: Credit provisions are extended for one additional year for members of the uniformed services, U.S. Foreign Service, or an employee of the intelligence community (and, if married, the individual's spouse) who serves on qualified official extended duty service outside of the U.S. for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010.

• Home Location: Within the U.S.

• Home Price: For homes purchased after November 6, 2009, no credit is allowed if the home’s purchase price exceeds $800,000.

• Seller: Cannot be purchased from a close relative.

• When Claimed: Credit can be claimed on the taxpayer’s return for the year of purchase or the preceding year

• Financing: Credit can be claimed even if financing is from tax-exempt mortgage revenue bonds

2008 CREDIT HIGHLIGHTS:

• Credit Amount: 10% of the purchase price with a maximum credit of $7,500 ($3,750 for those filing married separate)

• Repayment Required: In 15 equal annual installments beginning in 2010
• Purchased: After April 8, 2008 and before January 1, 2009

• Home Location: Within the U.S

• Seller: Cannot be purchased from a close relative

• When Claimed: Credit can be claimed on the taxpayer’s 2008 return

• Financing: No credit is allowed if the financing for the home is from tax-exempt mortgage revenue bonds.

Details: The following are some additional details that relate to the credit for both 2008 and 2009:

Definition of a First-Time Homebuyer - 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 three-year period before the purchase of the home to which the credit applies. If the individual is married, neither the individual nor his spouse may have had a present ownership interest in a principal residence during that three-year period, even if they file as married taxpayers filing separately. Ownership of a home outside the U.S. during the three-year period will not disqualify the taxpayer.

Definition of a Long-Time Resident - Any individual (and spouse, if married, i.e., both must meet qualifications) who have owned the same principal residence for any 5 consecutive years during the 8-year period ending on the date of purchase of a subsequent principal residence.

Coordination with D.C. First-Time Homebuyer Credit – No District of Columbia First-Time Homebuyer Credit is allowed to a taxpayer in 2009 or 2010 who also qualifies for the national first time homebuyer credit (which gives the taxpayer a greater credit).  If a taxpayer was eligible to claim the D.C. first-time homebuyer credit in 2008, or any prior year, the taxpayer was not eligible to claim the national first-time homebuyer credit for 2008.

Service Members Special Extension and Recapture Waiver - Credit provisions are extended for one additional year for members of the uniformed services, U.S. Foreign Service, or an employee of the intelligence community (and, if married, the individual's spouse) who serves on qualified official extended duty service outside of the U.S. for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010:

• Qualifying Period Extension - Extends the credit provisions one year, through April 30, 2011 (June 30, 2011, in the case of an individual who enters into a written binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2011) for any of the following on qualified official extended duty.

• Recapture Waiver – In the case of a disposition of a principal residence by an individual (or a cessation of use of the residence that otherwise would cause recapture) after Dec. 31, 2008, in connection with Government orders received by the individual (or the individual's spouse) for qualified official extended duty service, no recapture applies by reason of the disposition of the residence, and any 15-year recapture with respect to a home acquired before Jan. 1, 2009, ceases to apply in the tax year of the disposition.

Homes That Qualify - Only the purchase of a main home located in the United States qualifies.  Vacation homes and rental property are not eligible.

Income Limits – The credit is reduced or eliminated for higher-income taxpayers.  The credit is phased out based on the modified adjusted gross income (MAGI).  MAGI is the adjusted gross income plus various amounts excluded from income - for example, certain foreign income.  The MAGI limits are different depending upon the purchase date of the home.

• For homes purchased before November 7, 2009 - The phase-out range is $150,000 to $170,000 for married taxpayers filing a joint return.  For other taxpayers, the phase-out range is $75,000 to $95,000.  This means that the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.

• For homes purchased after November 6, 2009 - The phase-out range is $225,000 to $245,000 for married taxpayers filing a joint return.  For other taxpayers, the phase-out range is $125,000 to $145,000.  This means that the full credit is available for married couples filing a joint return whose MAGI is $225,000 or less and for other taxpayers whose MAGI is $125,000 or less.

Who Cannot Take the Credit – In addition to the other qualifications and limitations discussed above, a taxpayer cannot take the credit if the following apply:

• Home is purchased from a close relative. This includes a spouse, parent, grandparent, child or grandchild.

• Home is no longer used as the main home.

• Home is sold before the end of the year in which it was purchased.

• If taxpayer is under the age of 18 (if married, both under the age of 18) on the date of purchase and the home is purchased after November 6, 2009.

• If the taxpayer can be claimed as a dependent of another.

• Taxpayer is a nonresident alien.

• Home financing comes from tax-exempt mortgage revenue bonds.

How and When the 2008 Credit Must Be Repaid - The 2008 credit is similar to a 15-year, interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed.  The repayment amount is included as an additional tax on the taxpayer's income tax return for that year.  For example, if a $7,500 first-time homebuyer credit is properly claimed on the 2008 return, the taxpayer will begin paying it back on his or her 2010 tax return.  Normally, $500 will be due each year from 2010 to 2024.

A taxpayer may need to adjust his or her withholding or make quarterly estimated tax payments to ensure that they are not under-withheld.

However, some exceptions apply to the repayment rule. They include:

• Taxpayer’s Death - If a taxpayer dies, any remaining annual installments are not due.  If a joint return was filed and the taxpayer passes away, the surviving spouse would be required to repay his or her half of the remaining repayment amount.

• Ceases Being Main Home - If a taxpayer stops using a home as the main home, all remaining annual installments become due on the return for the year that happens.  This includes situations where the main home becomes a vacation home or is converted to business or rental property.  There are special rules for involuntary conversions. 

• Home Sold - If a home is sold, all remaining annual installments become due on the return for the year of sale.  The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer.  If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated.  For example, a home is purchased for $200,000 and the credit of $7,500 is claimed.  Assume that no improvements are made on the home and it is sold for $195,000 after repaying $500 of the credit.  The gain or loss would be measured for purposes of the accelerated credit recapture from $193,000 (the original cost of $200,000 less the $7,500 credit plus the $500 repayment).  In this case, there would be a gain of $2,000 on the sale ($195,000 - $193,000).   Thus, the taxpayer would only be liable for repaying $2,000 of the credit when the home is sold.  Had the home sold for $193,000 or less, there would be no repayment required.

• Divorce - If a home is transferred to a spouse or to a former spouse (as part of a divorce settlement), that person is responsible for making all subsequent installment payments.

• Involuntary Conversion - If the home is involuntarily converted (e.g., it is destroyed in a storm), and the taxpayer buys a new principal residence within a two-year period beginning on the date of the disposition or the date the home ceases to be the principal residence, the accelerated recapture rule does not apply.  However, the regular recapture rule applies to the replacement principal residence during the recapture period in the same way as if the replacement principal residence were the converted residence.

If you or a family member is contemplating on utilizing this credit, it may be appropriate to consult with this office in advance of a home purchase. 

The Saver's Credit provides a nonrefundable tax credit for contributions made by eligible, low income taxpayers to IRAs and qualified elective income deferrals. The plan provides incentives for lower income individuals to save for their retirement through available qualified plans. To qualify, the taxpayer must have reached the age of 18 by the close of the year and cannot be a full-time student or dependent of another.

The credit ranges from 10% to 50% of the first $2,000 contributed by each taxpayer to a qualified plan during the year. The credit gradually phases out as a taxpayer’s modified AGI increases.  This phase out is inflation adjusted from year to year, and the phase outs for 2010 are illustrated below:



Modified AGI - Adjusted gross income is determined without regard to foreign and protectorate income exclusions or foreign housing exclusions.

The credit is nonrefundable and offsets alternative minimum tax liability as well as regular tax liability.

Example – Eric and Heather are married and file a joint return.  Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account.  Their modified AGI for the year was $30,000.   The credit is computed as follows:



Eric and Heather file a joint return using the standard deduction for married couple and their tax for the year is computed as follows:

Caution – To prevent taxpayers from withdrawing contributions from existing plans, and subsequently recontributing the funds in order to qualify for the credit, Congress built-in a two-year look back period that generally reduces a taxpayer’s current year contribution by withdrawals during the look-back period.