First-time home buyers get a $7,500 purchase “credit”
Conforming loan limits move to $625,000
Delinquent homeowners get a lifeline from the FHA
Local governments get federal money for buying and restoring foreclosed homes
However, tucked away on the last few pages of the text, in a section called “Revenue Offsets”, there’s an important tax implication. The new housing law changes the way in which capital gains exclusions are calculated on the sale of a residence.
Under the old system, a taxpayer was entitled up to $250,000/$500,000 of tax-free gains from the sale of a home if filing separately/jointly provided he lived in the residence for at least 2 of the preceding 5 calendar years.
Savvy homeowners exploited this verbiage, moving from home-to-home every 2 years to avoid paying capital gains.
The new law thwarts this tactic.
Capital gains exclusions are now calculated by taking the capital gains on the sale of the home and multiplying it by a ratio of how long a person has lived in a home, by how long that person owned the home.
In the example above, a person living in a home for 2 of 5 years would be entitled to 40 percent of tax-free gains on a home sale instead of all of it. As always, however, it’s best to talk with a qualified accountant about how tax code changes may impact you personally.
The new capital gains rules go into effect starting January 1, 2009.
More than 130 million Americans will receive tax rebates this year as part of Congress’ $168 billion economic stimulus package.
Payments begin in about two weeks and range from $600 for individuals to $1,200 for couples, plus an additional $300 per child.
Not everyone is eligible for a full rebate, however.
For single filers earning more than $75,000 and joint filers earning more than $150,000, the tax rebate is reduced by $50 for each $1,000 of income beyond the limits.
An individual with no children, therefore, will not receive a tax rebate if income exceeds $87,000 annually. The IRS provides a tax rebate calculator that can help make sense of the math.
For tax filers using direct deposit, the rebates will be paid based on the last two digits of the social security number:
SSN ending in 00-20 will arrive May 2
SSN ending in 21-75 will arrive May 9
SSN ending in 76-99 will arrive May 16
For tax filers using paper checks instead of direct deposit, payouts begin a little bit later on May 16 and extend through mid-July. The IRS makes the exact dates known on its Web site.
For late income tax filers, the IRS send rebate checks about two weeks after the returns are processed, but not before the regularly scheduled date.
Today is Tax Day so here’s some IRS-related trivia to share at the water cooler:
Did you know… President Lincoln and Congress enacted the first income tax in 1862 to pay Civil War expenses.
Did you know… The Civil War income tax was repealed in 1872, revived by Congress in 1894, and ruled unconstitutional by the Supreme Court in 1895.
Did you know… In 1913, Wyoming was the deciding vote in the 16th Amendment which gave Congress the authority collect income tax.
Did you know… The first income tax was 1 percent on net personal incomes above $3,000. There was a 6 percent surtax on incomes over $500,000.
Did you know… The first 1040 form was 4 pages long — including instructions. Today, the instructions ALONE are 92 pages.
Did you know… During World War I, the highest rate of income tax was 77 percent. Taxes were used to help finance the war.
Did you know… In 1954, the tax filing date changed from March 15 to April 15.
Did you know… Electronic filings started in 1986. Today, e-filings have an error rate of 0.5 percent versus an error rate of 21 percent for paper filings.
And remember: If you don’t file tax returns, the Treasury Department won’t send your economic stimulus check. Happy April 15, everyone.
To see which method gives tax filers the “biggest bang for the buck”, ABC’s Good Morning America recently compared three popular tax preparation services:
TurboTax
H & R Block
Personal accountant
In declaring TurboTax the “winner”, the 4-minute video glossed over several important tax-related items.
The first is that true tax planning cannot happen in a 3-hour stint in front of a computer. Tax planning a year-round activity.
The second is that all personal financial decisions should be evaluated for their tax implications. That can’t happen without a personal accountant that knows your tax history and understands your financial goals.
The third is that filing income taxes is a personal event. The “winning” tax preparation method for the family on TV may not be what’s best for your family.
If you’d like a referral to a trusted accountant, please ask me. Filing your taxes for cheap today does not mean it will be the lowest cost to you long-term.
Many homeowners are entitled to two major tax deductions — one for annual interest paid on a home loan, and another for real estate tax bills paid to government.
Calculating your approximate tax credit is basic:
Add mortgage interest paid and real estate taxes paid together
So, for a homeowner that paid a combined $13,000 in mortgage interest and real estate taxes last year, and who is in the 28% marginal tax bracket, a tax credit of $3,640 may be due from the IRS.
This credit is one reason why some people sometimes refer to “after-tax mortgage rates”. An after-tax mortgage rate is the adjusted interest rate after the IRS doles out credits and is calculated as follows:
The same homeowner with a 6.000% mortgage rate, therefore, has an after-tax mortgage rate of 4.32%.
Because not every homeowner is eligible for mortgage interest and/or real estate tax deductions, and because not every homeowner should claim them, you should consult with your accountant to see how tax credits fit into your tax liability schedules.
Federal income taxes are highly personal and require the attention of an experienced professional.
Monday, President Bush signed the Housing and Economic Recovery Act of 2008 into law and the press jumped on the obvious storylines:
More than 130 million Americans will receive tax rebates this year as part of Congress’ $168 billion economic stimulus package.
Today is Tax Day so here’s some IRS-related trivia to share at the water cooler:
