By JAN M. ROSEN
Published: February 7, 2009
HOME is not only where the heart is. Increasingly, it is also where the tax breaks are, and not just the all-important deductions for mortgage interest and real estate taxes. Recent provisions offer breaks for home sales and purchases, for example.
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Of course, these provisions are but a few aspects of the nation’s complex and ever-changing tax code. There are many other possibilities for saving on taxes — or for being tripped up.
The new first-time homebuyer credit can reduce a couple’s taxes for 2008 or 2009 by up to $7,500, or a single filer’s by up to $3,750. Actually, the name is a bit of a misnomer. A “first-time homebuyer” is a person or couple who had no ownership interest in a principal residence in the United States during the three years ended on the purchase date of the residence for which the credit is claimed. Thus, someone who formerly owned a home, then rented for several years, could qualify. The purchase must be on or after April 9, 2008, and before July 1, 2009.
Homebuyers who qualify are allowed a one-time credit of 10 percent of the purchase price, up to the $7,500 or $3,750 limit, against their income tax for the year of purchase. Although it is termed a refundable tax credit in a 2008 law, it is essentially an interest-free loan that must be repaid in equal amounts over 15 years, starting the year after the credit is claimed. The credit is available to joint filers with modified adjusted gross income below $150,000; it phases out once income exceeds $170,000. For single filers, the numbers are $75,000 and $95,000.
“I think it’s a good deal,” said Barbara Weltman, a tax lawyer in Millwood, N.Y., who is also a contributing editor of “J. K. Lasser’s Your Income Tax 2009,” (Wiley, $18.95). “My daughter bought a home in October,” she said, and will benefit from the credit. And one proposal for tax legislation now being discussed in Congress is to eliminate the repayment requirement, making it an even better deal.
Widows and widowers who sold homes last year may also get a new tax break. Previously, couples were generally entitled to exclude gains of up to $500,000 when they sold a principal residence in which they had lived two of the previous five years, but for single filers the exclusion was limited to $250,000. Effective in 2008, a surviving spouse may exclude up to $500,000 if the sale occurs within two years of the other spouse’s death.
“This can make a huge difference,” said Sidney Kess, a New York tax lawyer and certified public accountant, citing the example of a widow in her 60s whose husband died in October. Under the previous law, she would have had to sell her house, the couple’s main asset, in just over two months to get the maximum exclusion. But given the state of the housing market, as well as emotional, family and estate issues, that would have been almost impossible. Now she has two years to sell.
Residential energy credits of 30 percent of the cost of certain improvements are available to homeowners, Ms. Weltman noted, with caps of $500 to $2,000, depending on the improvement. They include qualified expenditures on equipment for solar electric power, solar water heating, fuel cells, wind energy and geothermal heat pumps, and for their installation. More traditional energy-saving improvements, like increasing insulation to use less heating oil or natural gas, do not qualify.
Homeowners may also qualify for a plus-size standard deduction. Traditionally, taxpayers have had a choice of whether to itemize their deductions on Schedule A or to take the standard deduction. “Now people have to pay more attention as to whether they might be better off with the standard,” said Julian Block, a tax lawyer in Larchmont, N.Y.
The reason is that a 2008 law allows homeowners who take the standard deduction an additional standard deduction for state and local property taxes. It is $500 for single filers and $1,000 for joint filers. “People may want to plan ahead — take the standard deduction one year and itemize the next year,” he said, bunching outlays like charitable gifts and certain miscellaneous itemized deductions in the years they itemize.
Those who don’t own homes should also watch for potential savings and pitfalls.
DEDUCTING SALES TAXES People who itemize deductions have another choice, Mr. Block said: whether to deduct state and local income taxes or sales taxes. Congress originally enacted this option to put taxpayers in states like Texas and Florida that do not levy a state income tax on a par with those in other states; it has been extended for 2008 and 2009.
But even in a normally high-tax state like New York, some people may benefit by deducting sales taxes, Mr. Block said. That may be true if they have made a big purchase like a car or a yacht, or if they are retired, because “their New York state liability may be nominal or zero.” The state does not tax income from Social Security, pensions from state and local governments or the first $20,000 of other pension income.
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More Articles in Business » A version of this article appeared in print on February 8, 2009, on page BU9 of the New York edition.