Recapture and Repayment of Homebuyer Tax Credits

Taxpayers who have claimed the homebuyer tax credits over the last couple of years may have to repay some of the credit, starting with 2010 tax returns.  The rules differ depending on which credit you claimed.

$7,500 Credit for Home Purchases Between April 8, 2008 and December 31, 2008
The original First-Time Homebuyer Credit was a credit of up to $7,500 for first-time homebuyers.  Anyone who claimed this credit will have to repay the credit over 15 years, starting with their 2010 tax return.

Example
Someone claiming the full $7,500 credit will repay $500 of the credit each year for the next 15 years.  The $500 is included as additional tax owed on the back side of Form 1040.

If the home gets sold at any time during the 15-year repayment period, the outstanding amount of the credit is due in full in the year of the sale.

$8,000 or $6,500 Credit for Purchases Between January 1, 2009, and April 30, 2010
Legislation in November of 2009 changed the original First-Time Homebuyer Credit and added a second credit for long-time homeowners who purchased a new home.  The First-Time Homebuyer Credit was increased to up to $8,000 for homes purchased between January 1, 2009, and April 30, 2010.  Most importantly, this credit no longer had to be re-paid -- as long as the homebuyer lives in the new home for at least 36 months.

The legislation added a $6,500 credit for long-time homeowners who purchased a new home between January 1, 2009, and April 30, 2010.  This credit also does not have to be re-paid -- again, as long as the homebuyer lives in the home for at least 36 months.

If the homebuyer doesn't live in the home for at least 36 months, the entire amount of the credit is subject to being recaptured.  So, someone who claimed the full $8,000 credit for a first-time home purchase could see their tax bill increase by $8,000 if they sell their home before the end of 36 months.

There are certain exceptions to the recapture rules in situations where the homebuyer dies, is in the military, or sells the home for a loss.  It is best to seek the help of a tax professional if you think the recapture rules might apply to you.

Iowa's Dizzying Array of Tax Credits

In a recent post, I talked about 3 tax credits that are available to Iowans for various charitable contributions.  As a follow-up, I should note that these are just 3 of the approximately 30 tax credits that Iowa makes available to individuals and businesses for various things.  You may have noticed that the 3 credits mentioned in my last post can be confusing to decipher.  I can tell you that the other 27 (or so) credits are just as confusing. 

Iowa's dizzying array of obscure and confusing tax credits, coupled with multiple tiers of tax rates and a high "top rate," is why Iowa consistently ranks very low in terms of "tax friendliness." Plus, some of the credits have been very poorly administered and full of fraud.

Earned Income Credit Remains "Expanded" in 2011

The expanded Earned Income Tax Credit (EITC) that has been in place for 2009 and 2010 has been extended through 2011 and 2012.  The expanded credit allows a higher EITC for families with three or more qualifying children (the "normal," non-expanded EITC rules are based on a maximum of 2 qualifying children). 

For 2010, the EITC could be available to taxpayers with 3 children and income of up to $48,362 if married, and $43,352 for other filing statuses.  This is a slight increase over the 2009 amounts.

Special Iowa Charitable Credits

I spent quite a bit of time in December talking about charitable contributions and the deductions that taxpayers can take for those contributions.  Today, I'm going to talk about several tax credits that are available for certain charitable contributions made by Iowans. 

School Tuition Organization Tax Credit
Certain donations made to "School Tuition Organizations" may be eligible for a credit of up to 65% of the donation.  This credit is for contributions to qualifying private-school tuition organizations.  Chances are, you'll only consider taking this credit if your child attends a private school.  The school tuition organization will issue you a certificate, which must be attached to your tax return when you claim the credit.

Endow Iowa Credit
Donations made to certain community foundations in Iowa can be eligible for a tax credit of 25% of the donation.  The credit is non-refundable but any unused credit in the current year can be carried forward for up to 5 years.  This credit is administered by the Iowa Department of Economic Development and you have to file forms with them in order to claim it.  It is probably best to talk to a tax advisor before trying to claim this credit.

Charitable Conservation Contribution Credit
This credit definitely requires some planning and thought before it is claimed.  Iowans who donate land to a qualified organization for conservation purposes (such as donating land to a county conservation board) can claim a credit of up to 50% of the fair-market value of the land.  The maximum credit allowed is $100,000.  The credit is nonrefundable but any unused credit in the current year can be carried forward for up to 20 years.  It should be noted that the donation of land for conservation purposes is NOT always better than a sale of the land, in terms of net "cash in hand" after the transaction, even with the credit.  For this reason, it's important to talk to your tax advisor about your goals to make sure the transaction accomplishes what you want it to accomplish.

Residential Energy Credit Extended, But It's Not As Generous

The tax bill signed into law last week extended the "residential energy credit" that provides a tax credit for purchases of certain energy efficient doors, windows, insulation, furnaces, air conditioning systems, certain types of water heaters, and even certain types of roofs. 

The credit had been set to expire on December 31, 2010, but has been extended through 2011.  There's a catch though -- the amount of available credit has decreased, and people who have taken the credit in the past may not be able to take it at all in 2011.

2010 Rules vs. 2011 Rules

• 2010:  The credit is 30% of the purchase price.  The maximum amount of residential energy credit that you can take in total from 2005-2010 is limited to $1,500 (the credit has existed in several forms since 2005).
• 2011:  The credit is 10% of the purchase price, and the maximum amount of residential energy credit that you can take in total from 2005-2011 is limited to $500.

This means if you have claimed $500 or more in residential energy credits since 2005, the credit is not available to you in 2011.

Adoption Credit Increases for 2010 and 2011

The "health care reform bill" passed by Congress earlier this year increased the credit available for expenses incurred in adopting a child.  For 2010 and 2011, taxpayers can claim a credit of up to $13,170 for adoption expenses.  Allowable expenses include adoption fees, court costs, attorney’s fees and travel expenses,

The bill also changed the credit to make it fully refundable.  In prior years, the adoption credit was non-refundable, meaning it could only reduce your tax liability to $0.  Any unused credit could be carried forward to the next year.  Now, you can claim the whole adoption credit no matter what your tax liability is.

One important note for people who qualify for this credit:  you will NOT be able to e-file your return.  You'll have to file a paper return and attach documentation relating to the adoption (such as the adoption decree). 

As always, I recommend seeking out a tax professional if you think you qualify for this credit.

Residential Energy Credits Expire Soon

If you've been planning to make home improvements, time is running out -- not just on the weather but also on your chance to qualify for tax credits related to certain improvements. 

The "Residential Energy Credit" expires December 31.  The credit is available for qualifying purchases of energy efficient doors, windows, insulation, furnaces, air conditioning systems, certain types of water heaters, and even certain types of roofs. The credit is 30% of the purchase price.
Example:

If you spend $500 on energy efficient doors for your house, you can claim a credit of $150 on your tax return ($500 purchase price x 30%).

The purchases must be for an existing home that you live in as your principal residence. Purchases for new construction are not eligible for this credit, nor are purchases made for rental properties that you own.

The credit was available in 2009 as well, and the maximum total credit that you can take is limited to $1,500 combined in 2009 and 2010.

Please note that not all Energy Star rated purchases are eligible for the credit. You can find a listing of eligible products and more information in general about this credit at this website: http://www.energystar.gov/index.cfm?c=tax_credits.tx_index.

Can I Deduct Summer Camp Expenses?

If you send your kids to camp this summer, you might be able to deduct the cost on your tax return. The IRS allows a deduction for summer day camps, but not for overnight camps. In order for a day camp to be deductible, you have to meet two basic rules.

1. Your child must be under age 13.
2. The expenses must be incurred so you can work or look for work.

These are the same rules that have to be met in order to deduct daycare expenses.
The cost of the day camp would be included with your other childcare expenses, such as daycare expenses. You can claim up to $3,000 of childcare expenses per child per year, up to a maximum of $6,000 total for two or more kids. You then get to claim a credit of between 20-35% of that amount, depending on your income.
As mentioned earlier, the cost of overnight camps is not deductible, nor is the cost of sending your kids to summer school.

This is a basic overview of the subject. As always, if you have specific questions about your situation, consult your tax advisor.