Tax Credit for New Homebuyers May Get Better

If you bought a new home last year -- or are planning to buy one this year -- you may be able to cash in on a juicy new tax break when you file your 2008 federal return

You can claim a tax credit equal to 10% of the purchase price -- up to $7,500 -— if you bought a principal residence after April 8, 2008. (A tax credit, which reduces your tax bill dollar-for-dollar, is more valuable than a tax deduction that merely reduces the amount of your income that is taxed.) To qualify for the tax credit, you (and your spouse if you are married) cannot have owned a home during the previous three years.

Vacation homes and rental properties are not eligible, and you have to meet income requirements. For single taxpayers, the credit decreases as modified adjusted gross income rises above $75,000, and it disappears altogether above $95,000. For example, if your income is $85,000, you could receive a credit worth no more than $3,750. For married couples, the credit starts to decline when your modified adjusted gross income reaches $150,000 and disappears after $170,000.

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As currently structured, the new $7,500 tax credit for first-time home buyers is actually a tax-free loan that you must pay back to the government over 15 years -- starting two years after the year the credit is claimed. If you sell the house before the money is paid back, the loan is due in full in the year of the sale.

But Congress has already tinkered with the new law as part of the massive economic stimulus package. First-time home buyers who purchase a home between January 1 and November 30, 2009, can qualify for an $8,000 tax credit and they don't have to repay the credit as long as they remain in their house at least three years. (Those who bought their homes in 2008 still must repay the credit.)

Even if you buy a home this year, you can still claim the tax credit on your 2008 return. Use Form 1040X if you want to amend a 2008 return that you have already filed. Or you can extend your tax-deadline until October 15 by filing Form 4868. (An extension delays the deadline for filing forms but not for any payment you owe.)