Tax credits are a way for the government to financially incentivize taxpayers by giving them a direct reduction in the amount of taxes they owe when they file their tax returns.
For example, a first-time homebuyer tax credit, as the name implies, is designed for people who are buying a home for the first time. In the U.S., there was a program called the Federal First-Time Home Buyer Tax Credit that ran from 2008 to 2010 to encourage homeownership during the Great Recession.
Even though that program ended 13 years ago, there is currently a similar tax credit bill being considered in Congress. In the meantime, first-time homebuyers can still benefit from various federal and state assistance programs that offer tax credits, deductions, and other forms of help to make buying a home more affordable.
What is a tax credit?
It’s important to understand the difference between tax credits and tax deductions. A tax credit directly reduces your federal income tax on a dollar-by-dollar basis, while a tax deduction lowers your taxable income. For example, if you owe $300 in taxes and have a $300 tax credit, you owe $0 because the credit covers the entire amount.
Three types of tax credits are available through tax credit programs and federal tax credits:
- Nonrefundable Tax Credits: These deductions directly reduce your tax bill but won’t give you a refund. For example, if you owe $500 in taxes and claim a $1,000 nonrefundable tax credit, you’ll only get $500.
- Refundable Tax Credits: You receive the full amount of these tax credits, and if they reduce your tax liability below $0, you get a refund. The first-time homebuyer tax credit used to be refundable, but this may change as the bill is revised.
- Partially Refundable Tax Credits: Some credits provide a partial refund. If your tax liability becomes $0 before using the entire credit, you can get the remaining amount as a refund up to a certain limit or percentage.
Who qualifies for first-time homebuyer tax credits?
Although it might seem obvious, the qualifications for being a first-time homebuyer have specific conditions, especially for government agencies and programs. According to the U.S. Department of Housing and Urban Development (HUD), you may qualify as a first-time homebuyer if you meet these requirements:
- You haven’t owned a home or co-signed on a mortgage in the past three years.
- You’re a single parent who co-owned a property only with a former spouse while married.
- You’re a displaced homemaker who has owned a home solely with a spouse.
- You’ve only owned a home that’s permanently fixed to a foundation.
- You’ve only owned a home that doesn’t meet state or local building codes and can’t be brought into compliance for less than the cost of building a permanent structure.
So, even if you’ve technically held title to a property before, you could still be considered a first-time homebuyer and qualify for a first-time homebuyer tax credit.
What was the 2008 Federal First-Time Home Buyer Tax Credit?
The Great Recession devastated the U.S. housing market, affecting many people’s ability to buy a home. Starting with the Housing and Economic Recovery Act of 2008, a few federal tax credit programs were introduced for first-time homebuyers, spanning from April 9, 2008, to September 30, 2010.
Under the original program, eligible buyers could receive a tax credit equal to 10% of the home’s purchase price, up to $7,500 (later increased to $8,000). This credit had to be repaid in equal installments over 15 years. However, the 2009 extension eliminated the repayment requirement for buyers who remained in their homes for at least three years.
Sadly, this first-time homebuyer tax credit program came to an end in 2010. Fortunately, there’s a new bill on the table to help first-time buyers.
What is the Biden First-Time Home Buyer Act?
As mentioned earlier, there is a new first-time homebuyer credit under consideration in Congress, known as the Biden First-Time Homebuyer Act of 2021. This bill aims to offer a refundable tax credit of up to $15,000 for first-time homebuyers.
The intention behind this proposed legislation is to revive and modernize the tax credit from 2008 that has since expired. Under President Biden’s new plan, eligible first-time homebuyers could receive a tax credit equal to 10% of the purchase price of their home, with a maximum limit of $15,000.
As of September 2023, the Biden First-Time Homebuyer Act has not been passed into law, meaning that the tax credit is not available. While the House of Representatives approved the proposed legislation in March 2021, it still requires Senate approval. There is no set timeline for when the first-time homebuyer tax credit might be approved.
What is the NC Home Advantage Tax Credit?
An example of a state (and local) tax credit is the NC Home Advantage Tax Credit, which helps first-time homebuyers and military veterans in North Carolina save up to $2,000 each year on their federal taxes with a Mortgage Credit Certificate (MCC). If you qualify, you can get a tax credit for 30% of the interest you pay on an existing home (50% on a newly built home), up to $2,000 per year for every year you live in your home.
To get the NC Home Advantage Tax Credit, you must apply and get approved for an MCC from the NC Housing Finance Agency before you buy your home. You can apply for the MCC when you apply for your mortgage. Once you’re in your new home, you’ll receive your MCC, and you’ll be all set for tax time.
Other Assistance Available For First-Time Buyers
Since the federal tax credit for first-time homebuyers isn’t available, there are other programs to assist you in financing your home purchase.
- First-Time Homebuyer Loans
A first-time homebuyer loan is a specialized mortgage loan that aims to make homeownership more accessible for first-time buyers by easing some of the financial challenges associated with the home buying process. For example, VA and USDA loans require no down payment at all.
- First-Time Homebuyer Assistance Programs
First-time homebuyer loans and grants can help cover your down payment and closing costs. Local, state, and federal first-time homebuyer assistance programs are available in cities and counties across the United States.
- Tax Deductions
Even if you don’t qualify for a first-time homebuyer tax credit, you can still take advantage of deductions such as the mortgage interest deduction or property tax deduction to lower your tax bill. To get more information about these opportunities, it’s a good idea to speak with a tax expert.
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