$8000 Tax Credit now can be used as a down payment!!!!!

[SanDiegoEngineer]

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@Anonymous wrote:
What I don;t understand is how they can do it.  There is no way for the IRS or the buyer to know how much tax they are going to get back.  So, how do they determine that.  Is it a 12 month "loan" with a large balloon payment?  What happens if you end up not getting the full 8K back on yor taxes?

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It is what is called a "fully refundable" tax credit.

Under a normal tax credit, you would be correct - the tax credit offsets, dollar for dollar, the owed tax for the year, but the tax owed cannot go negative (i.e. if you owe $3K in taxes, but have a $4K tax credit, it only offsets the $3K to a tax owed of $0.)

A "fully refundable" credit, however, is different.  It doesn't matter how much you owe in taxes, a fully refundable credit is basically a check from Uncle Sam for the full amount - even if you are in a situation where you pay no taxes.  You are essentially guaranteed to get the full 8K - in addition to any refund you would normally be due.

i.e. - you have 4K withheld in taxes for the year.  You actually owe only 3K in taxes.  Your normal refund iwould be therefore 1K.  If you bought a house though, your refund would be 9K (basically your tax bill went to $-5000, and the IRS cuts you a check for not only all the money withheld, but 5K extra as well).

Message Edited by SanDiegoEngineer on 05-15-2009 12:16 AM

[Anonymous]

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@SanDiegoEngineer wrote:

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@Anonymous wrote:
What I don;t understand is how they can do it.  There is no way for the IRS or the buyer to know how much tax they are going to get back.  So, how do they determine that.  Is it a 12 month "loan" with a large balloon payment?  What happens if you end up not getting the full 8K back on yor taxes?

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It is what is called a "fully refundable" tax credit.

Under a normal tax credit, you would be correct - the tax credit offsets, dollar for dollar, the owed tax for the year.

A "fully refundable" credit, however, is different.  It doesn't matter how much you owe in taxes, a fully refundable credit is basically a check from Uncle Sam for the full amount - even if you are in a situation where you pay no taxes.  You are essentially guaranteed to get the full 8K - in addition to any refund you would normally be due.

i.e. - you have 4K withheld in taxes for the year.  You actually owe only 3K in taxes.  Your normal refund iwould be therefore 1K.  If you bought a house though, your refund would be 9K.

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That's mostly true.  However if you earn too much in a tax year then your refund is going to be less for the First TIme Homebuyers Credit. If a single person earns over $75000 or a couple over $150,000 (MAGI) then it gets adjusted down up til $20000 above those limits where it becomes zero.  So say a single person earns $95,000 as their adjusted gross then they would not get any of that $8000 homebuyer credit.  IF the property value is less than $80,000 then you will not get the full $8000 (hopefully you also shouldn't need a bridge loan for that much either cause if you do then you have no savings of your own for deposit and closing costs (or are putting down a much bigger deposit)

What if the witholding that they had for a year actually resulted in a shortfall? They had $4000 witheld but owed $5000 - even if they qualify for the full $8000 credit they would only actually get a check for $7000 but would have an $8000 loan to pay back (and if they couldn't then they may, in theory, start getting charged interest or balloon payments)

Eh, it's not the thing to rely on to make your home purchase available unless it is just for the last 1 or 2 thousand and the rest will be a cushion which you can keep to make payments in the horrifying possibility of that being required