Q What does it mean that the new tax credit is refundable?
A It means good news for many home buyers! A ‘refundable credit’ means that even if you pay little or no income tax, you can claim the credit and get a check from the IRS.
Let’s suppose you qualify for the tax credit. To qualify, you have to buy a home before June 2009. You have to be a ‘first time’ buyer, which means you haven’t owned a home in three years. You have to meet the income requirements and limits. For example, couples filing jointly must have incomes that total no more than $150,000 to qualify for the full credit. Single taxpayers must have incomes no more than $75,000 to qualify.
Now, if you do qualify, the tax credit will pay your taxes for you or you will get a check from the IRS of up to $7,500 in tax payments you have already made
If the credit is more than the taxes you owe, you will also get a check.
Here is an example. Suppose you had $4,000 withheld from your check during the year and your final tax bill at the end of the year was $5,000. You owe the IRS $1,000. But this year, you qualify for the $7,500 tax credit. The IRS sends you a check for $6,500 (the $7,500 credit minus the $1,000 you owe.)
Another example: If, at the end of the year, the taxpayer owes an extra $5,000 in taxes and qualifies for the $7,500 tax credit, the taxpayer pays nothing and receives a $2,500 check from the IRS.
A final example: You do your taxes and find you have overpaid taxes and you are due a $1,000 refund. If you qualify for the $7,500 tax credit, you receive a check for $8,500 (your $1,000 refund plus $7,500).
But remember, this tax credit is not free. You have to pay it back, but at very good terms. You will be getting an interest-free loan that you pay back at 6.5 percent a year for 15 years. So if you take the full $7,500 tax credit, you will have about $500 of extra tax liability every year for 15 years beginning in 2010