Congratulations First Time Homebuyers!
(Answers to Frequently Asked Questions Regarding Your Taxes)

Congratulations homeowner! You’ve successfully completed one of the biggest investments of your life.

Homeownership is the American dream. There are many tax advantages that come from ownership. This sheet answers some Frequently Asked Questions that many 1st time homebuyers have.

How should I expect my taxes to change?
As a first time homebuyer, you may have the opportunity to itemize your taxes. This is because home mortgage interest and real estate taxes are tax deductible. Itemizing your deductions also opens the way for you to take advantage of additional deductions such as gifts to charity, certain medical expenses, even tax preparation fees. These deductions (and more) are only available to taxpayers that itemize. An itemized return is a bit more complex than the standard deduction, but it can lower your tax bill tremendously.

Starting in 2008, even if you don’t itemize your return, your standard deduction can be increased by $500 ($1,000 if married filing jointly) because you’ve paid real estate taxes. These must be taxes that would have been deductible had you itemized.

How do I take advantage of the First Time Homebuyer Credit?
The American Recovery and Reinvestment Act (ARRA) provided one of the biggest incentives to buying a home this year. True first-time homebuyers may qualify for (up to) an $8,000 federal tax credit. You must have bought or entered into a binding contract to buy your home before April 30, 2010. You must close on the home on or before June 30, 2010, and the home must be in the U.S. For homes purchased after November 6, 2009, the credit is available to taxpayers with modified adjusted gross income (MAGI) of up to $125,000 ($225,000 for married filing jointly), the home can cost up to $800,000.  If you purchased your home before November 7, your (MAGI) must not exceed $75,000 ($150,000 for married filing jointly). To take advantage of the First Time Homebuyer Credit, you will be required to fill out IRS Form 5405.

I heard that the First Time Homebuyer Credit was expanded to include “long-time” homeowners, is that true?
Yes, the ARRA made additional modifications (effective November 7, 2009), to include “long-time” homebuyers who are purchasing a new home. If you have maintained your same principle residence for any five of the prior eight years before buying your new home, you may be eligible for a credit of up to $6,500. This credit does not affect the tax treatment of the sale of your current home (i.e. you still can exclude capital gain up to $250,000).

Are my points deductible?
As a general rule, the answer is no, they would be deducted over the term of the mortgage. But you can deduct the points if you meet the following nine tests defined by the IRS:

1. Your loan is secured by your main home (your main home is the one you live in most of the time).
2. Paying points is an established business practice in your area.
3. The points paid were not more than the amount generally charged in that area.
4. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.
5. The points were not paid for items that usually are separately stated on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, or property taxes.
6. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. You cannot have borrowed the funds from your lender or mortgage broker in order to pay the points.
7. You use your loan to buy or build your main home.
8. The points were computed as a percentage of the principal amount of the mortgage, and
9. The amount is clearly shown on your settlement statement.

Are my Mortgage Insurance Premiums deductible?
Yes, if you itemize, the premiums you pay or accrue during 2009 are deductible. That information would be included on line 13 of your itemized deductions.

What do I need to bring to my accountant for my tax return preparation?
Typically for your home you’ll need two things 1) proof of real estate tax payments and 2) proof of mortgage interest and points payment. If you paid $600 or more of mortgage interest, your mortgage holder will issue a Form 1098 (or similar statement). If you bought your home during that year the points will be included. If your mortgage holder also pays your property taxes out of your escrow account, that information will be found on the same form. You may also receive documentation from the state with exact amount paid (in Bergen County, we typically receive a white card showing exactly what was paid for the year). If you itemize, there’s much more that you should bring to your preparer. MCA can provide you with a Tax Organizer Checklist to help you prepare everything that you need, please contact us for your organizer.

How long should I keep my records?
Now that you more than likely will itemize it’s vitally important that you keep full and accurate records. These are necessary to support whatever deductions you take. You must keep your records for as long as they are important for meeting any provision of the federal tax law.

Generally speaking, keep records that support an item of income or deduction appearing on a return until the period of limitations for the return runs out (generally 3 years).

MCA Certified Tax Preparers
52 Woodbine Street, Suite D
Bergenfield, NJ 07621
201-338-4606
marc_adams@mcataxprep.com
http://www.mcataxprep.com

TAX ADVICE DISCLOSURE: Pursuant to the requirements of Internal Revenue Service Circular 230, we advise you that any federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of: (1) avoiding penalties that may be imposed under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication. This information is provided solely and exclusively for general, non-specific educational purposes. The information given in this communication is not meant to be a substitute for the services of a professional tax advisor. Please consult your advisor before taking any actionable item in this article.

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