Clarification on First Time Homebuyer Tax Credit

QUESTION:

I read that the tax credit is "refundable." What does that mean?

The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. This is not a deduction or a reduction in income to reduce tax liability, it is a REFUND. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit. This means that if someone needs to borrow the down payment funds, it will be able to be repaid back after 2009 taxes are filed and the refund is received.

For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).

This is great news to get people into homes and to reduce some of the inventory out there. If you have any further questions, please email me back and I can send you more detailed information or have your clients talk to a tax professional regarding the details.