$8,000 Tax Credit For All Home Buyers

With Congress reaching agreement on a $789 billion stimulus package for Americans and the President expected to sign it into law, the clock may be ticking for this year's home buyers and homeowners.

The package contains two benefits related to housing.

The first provision is fairly well-known. It gives first-time home buyers an $8,000 tax credit provided they purchase a home between January 1, 2009 and August 31, 2009.

This is a true tax credit.

To reduce misuse and abuse, however, the $8,000 credit is contingent on home buyers holding property for at least 3 years. If the home is sold in fewer than 3 years, the tax credit must be repaid to the government. It's also worth noting that the date range applies closings and not sales agreements.

Closings must occur within these 8 months to be eligible.

A second noteworthy feature in the package is that the stimulus package gives existing homeowners incentive to "green" their homes. With available tax credits for energy-efficient windows and doors, furnaces and insulation, homeowners can claim larger tax deductions based on home improvement, up to $1,500.

But, just because the government provides housing-related tax benefits doesn't mean you should just act on them blindly. Tax liability is a highly individual item and you may be ineligible for any number of reasons. Be sure to discuss your plans with a qualified accountant before committing to a plan.

A 5.00 Per Cent Mortgage Rate Is Really 3.60 Per Cent. Say What?

An oft-touted benefit of homeownership is its tax benefits. However, like most IRS-related items, understanding how the benefits work is not always clear.

In general, homeowners are entitled to two home-related tax deductions -- one for annual mortgage interest paid, and one for real estate tax bills paid.

Not everyone is eligible, though. Some of the exclusionary traits include total amount borrowed, and whether or not the home is a primary or secondary residence.

The official IRS publication is filled with notes and explanations but, in general, you can calculate your approximate mortgage interest tax deduction using the following math:

* Sum your annual mortgage interest and real estate taxes paid
* Find your tax rate on the IRS tax bracket schedule
* Multiple your tax rate by the sum from Step 1

This is grossly simplified, but fairly accurate.

As an example, a homeowner paying a combined $20,000 in 2008 mortgage interest and real estate taxes, and who is in the 28% tax bracket, may be due $5,600 in tax credits.

The availability of mortgage interest tax deductions is one reason why loan officers make reference to "after-tax mortgage rates". An after-tax mortgage rate is effective interest rate, post-tax code, and can be calculated using the formula below:

(After-Tax Mortgage Rate) = (Mortgage Rate) * (1 - Marginal Tax Rate)

The same homeowner with a 5.000% mortgage rate, therefore, has an after-tax mortgage rate of 3.600%.

Because not every homeowner is eligible for home-related deductions, and because not every homeowner should claim them, talk with your personal accountant before making any tax-related decisions.