3 Brand-New Tax Changes You Need to Know About

THE AMERICAN HOUSING Rescue and Foreclosure Prevention Act of 2008 (the Housing Act) was signed into law on July 30. The new legislation is supposed to stem the tide of home foreclosures and provide a lifeline to floundering mortgage lenders. It also includes three federal income tax changes that will affect many individuals. Two are intended to be helpful, but the third is meant to hurt. Here's what you need to know about all three.

The maximum credit equals the lesser of: (1) 10% of the home purchase price, or (2) $7,500 ($3,750 if you're married and file separately from your spouse). The credit is refundable. That means you can use it to offset your entire regular federal income tax liability plus receive the difference from Uncle Sam should the credit exceed your tax bill.

The credit is generally available for a principal residence purchased after April 8, 2008, and before July 1, 2009. However, you're only eligible if you have not owned a principal residence in the U.S. during the three-year period that ends on the purchase date. If married, your spouse must pass this test too. You also can't buy the home from your spouse, an ancestor (parent, grandparent, and so on), or a lineal descendant (child, grandchild, and so on). If you build a new home, the purchase date is considered to be the day you move in.

If you make a qualified home next year (before the July 1, 2009 deadline), you can opt to pretend the transaction happened in 2008 and claim a credit on this year's Form 1040. That will get the money to you a lot quicker. Otherwise, you can claim the credit for a 2009 purchase on next year's Form 1040, which you won't be able to file until sometime in 2010.

Fair enough. Now for the things Congress hopes you're too dumb to remember by election time.

It's Phased Out for "High-Income" Types
The credit is phased out or completely eliminated if your adjusted gross income (AGI) is "too high."

* The phase-out range for unmarried individuals and married folks who file separately is between AGI of $75,000 and $95,000. For example, say you're single with 2008 AGI of $90,000. If you buy a principal residence between now and year-end, the phase-out rule would reduce your credit by 75% to only $1,875 [$7,500 - ($15,000/$20,000 x $7,500) = $1,875].

* The phase-out range for married joint filers is between AGI of $150,000 and $170,000. For example, if your AGI is $170,000 or higher, there's no credit for you.

You Gotta Repay It
Finally — here's the real gem — the new credit is really just a loan from the feds. You have to repay it (without interest) over 15 years starting with the second year after the year you claim the credit.

For example, say you bag the maximum $7,500 credit for a 2008 home purchase. In 2010, you'll have to repay $500 ($7,500/15 = $500) with that year's Form 1040 and then continue the repayment drill through 2024 (unless you die first). If you sell the home or stop using it as your principal residence before repaying the credit, you'll generally have to cough up the unpaid balance with your Form 1040 for the year when that happens.

Now wait a minute! Wasn't the whole foreclosure mess caused by too many people borrowing too much money? Doesn't this new credit (which is really only a disguised loan) just add to the problem? No wonder Congress has a 19% approval rating! Your average citizen couldn't come up with anything this stupid.