$8000 First-time Homebuyer Tax Credit
Tax credits and deductions usually don’t get me very excited, but I’ve been following the first-time home buyer tax credit in the stimulus package with unusual interest over the last month. As we may actually be buying a condo this month, an $8000 tax credit makes a huge difference for us.
The original law had a tax credit of $7500, but it was essentially a loan as the credit had to be paid back in $500 increments on your taxes every year for 15 years. If you sold the home before then, the full amount was then due immediately. A first-time home buyer is defined as someone who has not owned a home in the previous 3 years. If this tax credit had stayed on the books and our condo purchase came through this month, I’m not sure we would have taken this credit. In fact, the original $7500 tax credit has been found to have little effect on the housing market.
The final bill of the stimulus package (American Recovery and Reinvestment Act of 2009) has an $8000 tax credit for first-time buyers (same definition as above). The $8000 is not a loan and is yours to keep as long as you live in the home as your primary residence for three years. If you do sell or rent it before then, you would have to pay the tax credit back. The size of the credit is 10% of the purchase price of your home up to $8000. So as long as your home costs more than $80,000, you can take the entire credit. However, the credit is subject to income limitations. You have to make less than $75,000 if your single and under $150,000 if you are married filing jointly.
What is less widely know about the tax credit is that even if you purchase your home in 2009, you can claim the credit on your 2008 taxes! We did this and used the money to immediately improve our new home. If you’ve already filed your taxes for 2008, you can submit an amended return to claim the credit early. But it’s worth looking at whether or not the credit will be more valuable to you in 2008 or 2009.
Do you plan of taking advantage of the new first-time home buyer tax credit?
Saving for retirement while living overseas
I received a question from a reader about how to save for retirement in his Roth IRA, while living outside the United States. Specifically, he wanted to know whether he could just pay taxes on the amount he wanted to contribute to an IRA and exclude the rest.
If you earned less than $87,600 in 2008 and take the foreign earned income exclusion (FEIE), you have to take it on all your income. You can’t separate out a portion in order to contribute to an IRA.
However, if you earn more than $87,600, anything over this amount but below $5000 can be contributed to an IRA. So for example, say you earned $91,000 in 2008. The difference – $3400 – can be contributed to an IRA because you will also be paying US taxes on the $3400.
If you don’t earn over the FEIE amount of $87,600, one other possible way to contribute to an IRA is to take the foreign tax credit instead of the FEIE. This can be done by filing IRS Form 1116. Depending on the tax rates of your current country, if they are a similar level to the US, you may still end up owing none or very little US taxes on your income after subtracting the foreign taxes you’ve already paid. But if your foreign tax rates are low, you may owe a lot of US taxes not covered by the credit.
By taking the foreign tax credit though, you can contribute the full $5000 (assuming you earn > $5000) to an IRA since all your earnings are potentially subject to US taxes. This is still true even if the tax credit for the foregin taxes completely wipes out your US tax liability.
It’s definitely worth doing both Form 1116 (foreign tax credit) and Form 2555 (FEIE) to see which works out better for you.
Here are two articles that might help:
http://www.irs.gov/pub/irs-pdf/p54.pdf
http://www.aca.ch/joomla/index.php?option=com_content&task=view&id=156&Itemid=46
Link to form 1116 and the instructions:
http://www.irs.gov/pub/irs-pdf/f1116.pdf
http://www.irs.gov/pub/irs-pdf/i1116.pdf
Tracking my spending
Mrs. Micah at Finance for a Freelance Life is challenging her readers to manually track their spending in February. This is something I’ve been meaning to start up again. A couple of years ago, I read “Your Money or Your Life” by Joe Dominguez and Vicki Robin and it really changed how I look at my finances. I tracked my finances manually for several months and learned a ton about where my money goes. I know for a fact that my biggest weakness in eating out. I’ve cut way back on dinners out but still have a terrible time bringing my lunch from home. With all the changes we have coming up, I feel like this would be a useful exercise to help prioritize our spending for the baby and a possible mortgage.
Currently, I’m using Mint to keep track of my expenses. I like how easy it is to check in on my finances. My favorite feature is the trends analysis. Mint creates a pie chart of your monthly expenses broken down into major categories and then you can drill down into each category to see all your expenditures. There are several drawbacks to Mint though. It doesn’t keep track of how much I save each month in relation to the other categories. In addition, because we have many accounts that we transfer funds between, it really screws up the tracking in Mint.
I truly believe that tracking and analyzing spending by hand is the most powerful way to understand where your money is going. Once you have that understanding, then you can start making significant changes.
So here goes.
Feb. 1, Sunday – total $140.80
Breakfast and to-go bagels from Einstein Bros $17.70
Last purchases at Babies’r'us before baby arrives $123.10
Feb. 2, Monday – total $27.12
Drinks and snacks at CVS $4.86
Lunch at Potbelly $6.69
Dinner at Boston Market $15.57
Join in at Where’s my money going?