by Milandria King, LL.M of Cordell & Cordell, PC
Recent legislation offers breaks for home sales and purchases, above and beyond the deductions for mortgage interest and real estate taxes. The new first-time homebuyer tax credit may reduce a tax bill for 2008 or 2009 by up to $7,500 for a single filer or a couple filing jointly, even if that couple is in the midst of a divorce. For purposes of clarification, “first-time homebuyer” is an individual or a couple who had no ownership interest in a principal residence in the United States during the three years ending on the purchase date of the residence for which the credit is claimed. Thus, someone who formerly owned a home, then rented for several years, would qualify for this credit. The purchase must be made on or after April 9, 2008 and before December 31, 2009.
Homebuyers who qualify are allowed a one-time credit of 10 percent of the purchase price, up to the $7,500 limit, against their income tax for the year of purchase. Married taxpayers who file separately may claim no more than $3,750 each. Although this is referred to as a refundable tax credit in a 2008 law, it is essentially an interest-free loan that must be repaid in equal amounts over fifteen years, starting the year after the credit is claimed. The credit is available to joint filers with modified adjusted gross incomes below $150,000; it phases out once income exceeds $170,000. For single filers, the values are $75,000 with a $95,000 phaseout.
Widows and widowers who sold homes last year may also receive a new tax exclusion. Previously, couples were entitled to exclude gains of up to $500,000 when they sold a principal residence in which they had lived for two of the previous five years, but for single filers the exclusion was limited to $250,000. Effective starting in 2008, a surviving spouse may exclude up to $500,000 if the sale occurs within two years of the other spouse’s death.
Homeowners may also qualify for a plus-size standard deduction. Taxpayers have generally had the choice of whether to itemize their deductions on Schedule A or to take the standard deduction. Now taxpayers must consider whether they might be better off with the standard. The reason for this is that a 2008 law allows homeowners who take the standard deduction an additional standard deduction for state and local property taxes. It is $500 for single filers and $1,000 for joint filers. It would be wise, here, to plan ahead by claiming the standard deduction in one year and itemizing the next. This would allow the taxpayer to lump together gifts such as charitable donations.
In addition to tax benefits for homeowners, military personnel and their families may qualify for a number of tax breaks. Combat pay, for example, is not taxable up to the highest rate of enlisted pay which was $7,100 a month in 2008. For income that is taxable, members of the armed forces have the flexibility of extended deadlines to file and pay. The Internal Revenue Service offers information on these benefits on its website at www.irs.gov/newsroom, in addition to Publication 3, the “Armed Forces Tax Guide”.
The loss of a job also has implications at tax time. Unemployment compensation is taxable for 2008, but expenses incurred in the search for a new job in the same area of work are deductible. For taxpayers who are financially distressed, the I.R.S. promises to be a little more flexible in approving requests for installment payment plans for their taxes on Form 9465. Requests for less than $10,000 may be approved automatically for taxpayers who have not entered into installment agreements in the past five years. This is significant for those who may qualify and benefit.
Additional strategies, tips, and available credits and deductions are available at www.irs.gov.
Milandria King is a Senior Attorney in the Memphis, Tennessee office for Cordell & Cordell, P.C., admitted to practice law in the state of Tennessee. Additionally, Ms. King is admitted to practice before the Sixth Circuit Court of Appeals and before the United States District Court for the Western District of Tennessee. Her memberships include the American Bar Association, the Memphis Bar Association, the Tennessee Bar Association, as well as the Association for Women Attorneys.