Answers to some complicated economic stimulus questions
Keith E. Huebel, a certified public accountant with Huebel & Associates in Bel Air, answers this latest round of questions:
Q. Like several of my co-workers, who received a decrease in the federal income tax withheld from our paycheck today, I am concerned that I will not have enough funds deducted from my paycheck to cover the taxes I owe when I file my 2009 tax form. You mentioned earlier that my employer will be receiving a new withholding table, but does that mean that the tax tables for 2009 will also be changed? I honestly do not understand the object of the stimulus if I have to return the funds that weren't withheld now, next year.
A: The reduced withholding per pay is an advanced receipt of the "Making Work Pay Credit" as passed in the American Recovery & Reinvestment Act of 2009. Unlike the 2008 Stimulus Rebate received in the form of a single check, this benefit (stimulus) is received periodically throughout the year in the form of reduced withholding in your paycheck.
Your federal withholdings are reduced and a corresponding credit will be permitted to "qualifying" individuals when the 2009 return is filed. If you "qualify" for the credit, then it should wash.
As you note, it is possible to receive the reduced withholding throughout the year, and not qualify for the credit and wind up having to pay when you file the return. If you feel you'll owe, you can adjust your withholding allowances to compensate.
Q. I had my house before me and my wife married. I bought it in 2002 and in 2005 we had to file bankruptcy. My house was not re-affirmed thus included, but we lived in it till now making normal payments to the bank but it doesn’t show on my credit, it shows included in bankruptcy. She has been approved for a new home and would be first-time homebuyer. Would we still be able to get the credit? Any help would be great. The company she is buying it from and the mortgage lender are saying she can, but I have my doubts.
A: Your doubts are justified. First, if the lender never foreclosed on the mortgage, you technically still on the home. Your credit report is not the deciding factor. Land records reflect the proper ownership. Therefore, if you still own the property, you would be disqualified from the new first-time homebuyer credit.
The second issue is whether your ownership effects your spouse’s qualifications and the answer is yes. Under IRC Sec 36(c)(1), which governs the new credit, states: "The term “first-time homebuyer” means any individual if such individual (and if married, such individual's spouse) had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which this section applies." Additionally, Section 36 refers to Section 121 in defining a principal residence which states when filing a joint return, each spouse is treated as owning the property during the period either spouse owned the property.
There are special provisions for unmarried couples who jointly purchase a principal residence where attribution from one to the other does not apply. This could be easily be confused by the Realtor and lender since the deed was not in both names.
Q. I want to cash in an IRA and use it as toward a home purchase. It would put me above the $75,000 income limitation in 2009. If I buy a house, can I take the credit on my 2008 return since my income will be under this threshold last year?
A. To specifically answer, yes, you can elect to claim the qualified 2009 purchase of a first time home credit on your 2008 return. A couple of issues, though, warrant discussion here.
First, if you are under the age of 59 1/2, the IRA distribution is not only subject to income tax, but subject to a 10% penalty. A special provision permits taxpayers under this age to waive the 10 penalty on up to $10,000 of early IRA distributions if they are a first-time home buyer. So depending on how much of an IRA distribution you plan to take and your age, the 10% penalty will apply to distributions over $10,000.
Second, if such taxes and penalties apply to 2009 from the IRA distribution, it may be advantages to claim the credit in 2009 to offset the additional tax from the IRA distribution.
Third, the $75,000 "modified adjusted gross income (MAGI) limitation is starting point for the credit to be phased out. It is fully phased out when MAGI reaches $95,000. So as long as your MAGI is below $95,000, you should be entitled to a portion of the credit in 2009.
You should run the numbers both ways, 2008/2009 and see which year provides the better benefit.
Q. Confusing, but here goes. I owned a home with my spouse, we filed for divorce. I moved out and rented for the past four (4) years. When it says, first-time homeowner, it says owned a "principal residence" in the last three years. I did not sign over the house until 2-1/2 years ago because of his stall tactics. Again, I did not live there. If I buy a home now, will I qualify for the $8,000 credit? I think so, but wanted another opinion. Thank you.
A. Additional facts may be necessary to properly answer your question. You indicate you filed for divorce four years past, but when was the divorce finalized by the courts? Did the divorce decree require transfer of the house from you to your ex-husband?
The new credit falls under the guidance of Internal Revenue Code (IRC) Section 36 which then utilizes the definition of "principal residence" under IRC section 121. This section states "..., an individual shall be treated as using property as such individual's principal residence during any period of ownership while such individual's spouse or former spouse is granted use of the property under a divorce or separation instrument ...".
The code and regulations are very date specific, so possibly you could purchase your home before 12-31-09 but after the three year period lapse from divorce and title transfer.
UPDATE: Don't miss Eileen's other Q&As on the economic stimulus plan, the $8,000 for first-time homebuyers and more.
Comments
My husband and I are looking to purchase a new home. He is a 100% disabled veteran and on Social Security. He does not pay any taxes. I own a townhouse that we have lived in for the last 3.5 years, and that I purchased prior to our marriage. Can he claim the new home purchase tax credit even if he pays in no taxes so long as he files taxes?
If he purchases the new home in his name alone (which is likely the best scenario for us while I try to sell the townhouse), can he still claim the tax credit if we file taxes separately? Under that scenario if he can't get the tax credit, would it be easier for us to file for divorce by the end of the year so he can file 2009 taxes as single and then donate 1/2 of the house to me after remarriage? I'm a lawyer, and worst case scenario under these facts, I pay the $300 for the divorce and $100 or so to get remarried.
Did I mention we have a prenuptial agreement? Would that have any affect on the above facts?
I'd like to think you are joking about divorcing your husband to get a tax break. But if you're not, I ran your question by Mark Steber of Jackson Hewitt. He immediately noted that the IRS prohibits people taking extreme action they normally wouldn't do - like moving to one state for a month to get a tax break and then moving back - just to save on taxes. Your divorce and remarriage would fall into that category. - eileen
Posted by: Lisa L | March 24, 2009 2:16 AM
I bought a house 4 years ago and had to let that go about a year ago. My soon to be husband is planning to get a house. He is purchasing the house on his own, my name will not be on the title. He will be the first time home buyer. If we get marry before he purchase a house, would he be qualify for the tax credit? If we file for tax separately next year, will it change anything?
I just sent a batch of questions to a tax pro. I'll forward your question to. Check back in a few days for the answer -ema
Posted by: Rohymah | April 28, 2009 1:20 AM