Taxpayers who own homes will be interested in IRS and first time homeowner tax credits for 2013. Tax credits differ from tax deductions in that tax deductions lower taxable income, and tax credits reduce the tax liability or overall tax amount owed. Two tax credits in particular deserve attention, namely the First-time Homebuyer Tax Credit and the Residential Energy Efficiency Tax Credit.
First-time Homebuyer Tax Credit (FTHBC)
First-time homebuyers may utilize this tax credit for primary residences purchased in 2008, 2009 or through September 30, 2010. The credit reduces taxpayer liability or increases the taxpayer’s refund. Taxpayers receive refunds for this tax credit even if the homeowner owes no tax, or the credit exceeds the tax liability. The credit is essentially an interest-free loan, as recipients must repay the loan over 15 years through the federal income tax return process.
Repayment conditions vary depending upon when the house was purchased. For homes purchased in 2008, the owner must repay 1/15th of the credit each year, with a maximum of $500 per year. Owners who purchased homes in 2009 or 2010, do not need to repay their credit as long as the property remains the primary residence for three years after the purchase.
The repayment amount gets added to any other taxes owed on federal tax returns. The repayment can result in either more taxes owed to the IRS or a reduced refund. Homeowners must attach a Form 5405 to the tax return when making the repayments.
If the owner sells the house or no longer uses it as the primary residence, then this must be submitted to the IRS on Form 5405. The repayment obligation then depends upon when the house purchase was made. Homeowners who purchased in 2008 must pay off the remaining tax credit balance, whether there was a loss or gain on the sale. Owners who purchased in 2009 or 2010 who sell before the three-year requirement must also repay the remaining tax credit balance. Taxpayers must also repay the entire outstanding balance for any home that is destroyed or condemned without replacement. Finally, homes converted to a business or rental must also repay the balance.
The IRS maintains an online look-up tool to assist FTHBC owners with their accounts. The site includes account details such as the purchase year, the amount of tax credit received, the annual repayment amount and account balance.
Energy Efficiency Tax Credit
The tax credit for residential energy improvements was also extended for 2012 and 2013 in the American Taxpayer Relief Act of 2012. These tax credits may be used for home improvements or appliance purchases that increase energy efficiency. This tax credit allows up to $500 total to purchase and install eligible items such as qualified water heaters, furnaces, heat pumps, central air conditioners, new windows or a new roof. More information on the residential energy efficiency tax credit can be found here.