The Worker, Homeownership, and Business Assistance Act of 2009 has extended the tax credit of up to $8,000 for qualified first-time homebuyers purchasing a principal residence.

The tax credit now applies to sales occurring on or after January 1, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010, will still qualify.

For sales occurring after Nov. 6, 2009, the act establishes income limits of $125,000 for single taxpayers and $225,000 for married couples filing joint returns.

The income limits for sales occurring on or after January 1, 2009, and on or before Nov. 6, 2009, are $75,000 for single taxpayers and $150,000 for married taxpayers filing joint returns.

The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a mortgage professional, a qualified tax advisor or legal professional about your unique situation.

Who is eligible to claim the $8,000 tax credit?

First-time homebuyers purchasing any kind of home — new or resale — are eligible for the tax credit.

To qualify for the tax credit, a home purchase must occur on or after January 1, 2009, and on or before April 30, 2010. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the homeowner.

A limited exception exists for certain contract for deed purchases and installment sale purchases. See the Internal Revenue Service Web site for more detail.

However, the law also allows home sales occurring by June 30, 2010, to qualify, provided they are due to a binding sales contract in force on or before April 30, 2010.

Persons who are claimed as dependents by other taxpayers or who are under age 18 are not qualified for the tax credit program.

What is the definition of a first-time homebuyer?

The law defines a first-time homebuyer as a buyer who has not owned a principal residence during the three-year period prior to the purchase.

For married taxpayers, the law tests the homeownership history of both the homebuyer and his/her spouse.

For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time homebuyer tax credit.

However, IRS Notice 2009-12 allows unmarried joint purchasers to allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter.

Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time homebuyer.

How is the amount of the tax credit determined?

The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

Are there any income limits for claiming the tax credit?

Yes. For sales occurring after Nov. 6, 2009, the income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return.

The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $125,000 for single taxpayers and $225,000 for married taxpayers filing a joint return.

The phase out range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.

The income limits for claiming the tax credit were raised when the tax credit was extended.

Are the higher limits retroactive?

No. The new income limits are only applicable to purchases occurring after November 6, 2009.

The income limits for sales occurring on or after January 1, 2009 and on or before November 6, 2009 are $75,000 for single taxpayers and $150,000 for married couples filing jointly.

What is modified

adjusted gross income?

Modified adjusted gross income or MAGI is defined by the IRS.

To find it, a taxpayer must first determine “adjusted gross income” or AGI. This is the total income for a year minus certain deductions (known as adjustments or above-the-line deductions), but before itemized deductions from Schedule A or personal exemptions are subtracted.

On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form.

For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income. See IRS Form 5405 for more details.

Do I qualify for a credit if my income is over the limit?

Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose modified adjusted gross income (MAGI) exceeds the phase out limits.

Can you give an example of a partial tax credit?

Just as an example, assume that a married couple has a modified adjusted gross income of $235,000. The applicable phase out to qualify for the tax credit is $225,000, and the couple is $10,000 over this amount.

Dividing $10,000 by the phase out range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5.

To determine the amount of the partial first-time homebuyer tax credit that is available to this couple, multiply $8k by 0.5. The result is $4k. Here’s another example: assume that an individual homebuyer has a modified adjusted gross income of $138k.

The buyer’s income exceeds $125k by $13k. Dividing $13k by the phase out range of $20k yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35.

Multiplying $8k by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.

Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances.

You should always consult your tax advisor for information relating to your specific circumstances.

How is this credit different from the one in early ’09?

The tax credit’s income limits were increased, the documentation requirements were tightened, and the program’s deadlines were extended.

How do I claim the tax credit?

You claim the tax credit on your federal income tax return. Specifically, homebuyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). No other applications are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time homebuyer tests.

Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date. It must be a completed purchase.

Homebuyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase.

Steve Kellerman is a certified mortgage planner with Davis and Amaral Mortgage Consultants, Inc. He can be reached at (916) 812-5547 or by e-mail at steve@stevekellerman.com.