The First-Time Home Buyer Tax Credit in 2022
There are lots of perks to buying a home for the first time, from having the freedom to decorate exactly how you want to building equity in your home over time. When you first buy a house, you may also wonder whether you can take advantage of one other major benefit – the first-time home buyer tax credit.
While the first-time home buyer tax credit was introduced in April 2021, it’s currently awaiting a House vote. As of December 2022, it’s not available.
As Americans wait for this bill, known as the First-Time Home Buyer Act of 2021, to become law, it’s helpful to learn more about it and how to qualify.
What Is A Tax Credit?
A tax credit is a reduction of your federal income tax on a dollar-by-dollar basis. For example, let’s say you have a tax bill of $500. If you have a $500 tax credit through a tax credit program, your tax liability would then end up as $0.
There are three types of tax credits through tax credit programs and federal tax credits:
- Nonrefundable tax credits: These are directly deducted from your tax liability until it brings the amount you owe to $0. However, you lose any refund you might have gotten since this tax credit will never generate a refund. In other words, let’s say you have a $500 tax bill and claim a $1,000 nonrefundable tax credit. You can only get $500 – not the full credit – since that’s what you owe.
- Refundable tax credit: These tax credits are paid out in full and you're entitled to the full amount of credit. If your credit reduces your tax liability below $0, you'll get a refund.
- Partially refundable tax credit: Some tax credits only give you a partial refund. In other words, if you reduce your tax liability to $0 before using the entire portion of a deduction, you can take the remainder as a refundable credit up to a certain amount or percentage.
Certain tax breaks are not tax credits – sometimes tax benefits come in the form of tax deductions, a term easily confused with tax credit. Unlike a tax credit, a tax deduction means that you subtract from your taxable income to lower the tax amount you owe. For example, you can deduct a portion or all of your property taxes.
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What Is The First-Time Home Buyer Tax Credit And How Does It Work?
When buying your first home, you may wonder if first-time home buyers get tax credit benefits and how one may qualify for this benefit.
The 2008 First-Time Home Buyer Tax Credit
The Housing and Economic Recovery Act (HERA) came about during the financial crisis of 2008 to help first-time homebuyers make it more affordable to purchase a home in the United States. The tax credit was worth up to $7,500 in the first year, then it increased up to $8,000 in 2009. Homeowners were able to get a tax credit in the year they first bought their home. However, this credit ended in 2010.
First-Time Home Buyer Tax Credits In 2022
It has been 12 years since the last first-time home buyer tax credit expired. However, U.S. lawmakers introduced the First-Time Homebuyer Act of 2021, also called the First-Time Homebuyer Tax Credit. It would grant eligible home buyers up to $15,000 in refundable federal tax credits. As of now, the tax credit is still a bill and has not yet passed into law.
The bill, which supports tenets of President Biden's campaign, would make homeownership more accessible. It's worth mentioning that the bill may never pass or may pass within a few months.
How Can You Qualify For The First-Time Home Buyer Federal Tax Credit?
You must be a first-time home buyer to be eligible for this tax credit. That means you can't have co-signed a mortgage or bought a house in the last 3 years, including either a primary residence or second home. You also can’t have used the first-time home buyer tax credit before. You must also purchase a primary residence – one that you will live in during most of the year. Eligibility for first-time buyers also includes the following requirements. You:
- Must not exceed gross income limitations for the area – the tax credit is meant for low- and middle-income families.
- Must be at least age 18 or have a spouse who is at least 18
- Must purchase a home from a non-relative.
It's worth mentioning that the Act specifies that those who use the home buyer tax credit but change primary residences or sell within a 4-year time span will have to contend with a tax liability based on the number of years that they stay in the home.
In other words, if you sell or move in the first year of owning your home, you will repay the full $15,000 in the form of taxes. Moving or selling within 2 years requires you to repay 75% in taxes – $11,250. Moving or selling within 3 years requires you to repay taxes at 50%, or $7,500. Moving or selling within 4 years requires you to repay taxes at 25%, or $3,750 of the original $15,000.
However, there are exceptions (particularly in the case of death, divorce and certain military situations). Furthermore, if you choose to sell your home within 4 years to a non-relative or if homeowners experience real estate gains of less than their tax liability, they need only pay those real estate gains.
In other words, let's say you receive a $15,000 credit when you purchase your home. You decide to sell it within the first 2 years of purchasing your home. You make $3,000 on the sale, which means that you must pay $3,000 in taxes.
How To Apply For The First-Time Home Buyer Tax Credit
Since it’s not currently available, no specific application requirements currently exist for getting a first-time home buyer tax credit. Once passed into law, more information may become available. You’ll likely have an additional IRS form when you file your taxes. Check with your tax preparer for more details about how the potential application process will work, and don't forget to check into mortgage interest deduction while you're at it. The mortgage interest deduction subtracts the interest paid from your taxable income on the loan you use to purchase a home.
Of course, to be considered a fist-time home buyer, you’ll need to buy a home. Follow the 10 steps to buying a house, which generally include checking your credit score, getting approved for a mortgage, finding a home and making an offer. Keep in mind such expenses as your down payment and closing costs. And while you may get a tax credit when you become a first-time homeowner, you’ll also get new debt. This financial obligation comes with a required monthly payment that includes an interest rate, taxes and insurance.
Other Assistance Available For First-Time Buyers
Since the first-time home buyer federal tax credit does not yet exist, there’s other support available to help you fund the purchase of a home. This includes first-time home buyer assistance programs that offer grants and loans to help pay your down payment and closing costs.
First-time home buyer grants are free money that you don't have to pay back. Meanwhile, first-time home buyer loans require repayment. Some loans are forgivable, which means that you may not have to pay them back, but you typically need to meet certain requirements.
Other assistance programs may also help in the future. For example, the American Dream Down Payment Assistance program, currently going through Congress, has stipulated that it will help set up tax-free accounts to help people save for a down payment.
The Bottom Line: First-Time Home Buyer Tax Credit Can Reduce Your Tax Bill
If passed into law, the First-Time Homebuyer Tax Credit will grant first-time home buyers up to $15,000 in refundable federal tax credits. As of now, the tax credit is still a bill.
You may be itching to know how to apply for a first-time home buyer tax credit, particularly if you're looking to purchase a home right now and want to put some money back in your pockets. The tax credit may not be available for you at this time, but you can take advantage of other opportunities such as first-time home buyer assistance programs or property tax deductions.