Big Things in Congress for First-Time Homebuyers

man holding a key to his new home

During President Joe Biden’s campaign, he had made promises about bringing back incentives and credits to help first-time homebuyers. At a time when interest rates are at an all-time low, there may be some help coming through Congress for those wanting to buy their first home. 

Rep Earl Blumenauer and Rep Jimmy Pancetta announced sponsorship of two bills.  If passed they could result in as much as $25,000 in down payment assistance and a new first-time home buyer’s credit up to $15,000. Rep. Blumenauer stated that this legislation would help those who have been historically shut out of the housing market If passed these huge incentives this will open a chance to buy for so many people that have been waiting on the sidelines with hopes of buying a home.


Who Qualifies for the First-Time Homebuyer Tax Credit?

The first big question is who qualifies as a first-time home buyer and has eligibility for this tax credit.  Eligibility will come down to income level, home price, and other factors. Qualification would be reserved for first-time homebuyers. They are considering people for the first-time home buyers’ tax credit anyone who has not owned a home in the last 3 years, a single parent or displaced homemaker who has only shared ownership with a spouse while married, or anyone who has owned a home that not permanently connected to a foundation. Also, someone who owned a home but lost it due to financial distress including foreclosure can qualify.

With the 1st Bill which is “The Down Payment Toward Equity Act of 2021” up to $20,000 can be provided to a homebuyer as assistance. $25,000 can be provided to eligible homebuyers if the buyer qualifies as socially or economically disadvantaged. For the average home buyer, this would take the average homebuyer 14 years to save this amount. So, this can provide substantial help. 

To be eligible for this grant a homebuyer cannot make more than 120% of their median local income. The amount required to be paid back to the government will be dependent on how long you live in the home. If you are not living in the home within the 1st year, then you would have to pay back the debt in full. Each year after that the amount you would have to pay back would decrease by 20%. So, if you lived in the home for 5 years you would not have to pay back the amount at all.


How the Tax Credit Works

The 2nd bill is the “1st Time Home Buyers Act “this would provide a tax credit of up to 10% as a home’s purchase price or as much as $15,000 to first-time home buyers. To be eligible for this you cannot make more than 160% of your area’s median income. A tax credit directly reduces your actual tax bill. A lot of people confuse it with a deduction, which reduces taxable income. 

Also, this credit will be considered refundable which means that if you owe less in taxes than the amount received you would receive the difference added to your annual refund. This would be like the first-time homebuyer credits approved by Congress during the great recession. A big difference from those tax credits is that this credit could be advanceable to be used at the time of purchase which would help homebuyers unable to save up much-needed down payments.

Studies show that the advanceable 15% tax credit could cover a standard 3.5% down payment for a 30-year mortgage with a low rate of 3% which is readily available from the banks would set up 9.3 million renters so they could purchase a home and have a monthly payment at 1/3rd of there income. A standard 3.5% down payment on a typical home sold was less than $15,000 in 40 out of the largest 50 US Metros. This is based on the median home value in their area in 2020. Alexandra Lee a Zillow economic analyst said, “Legislation that reduces barriers to homeownership could allow millions of renter households to finally enjoy the stability and wealth-building owning a home can provide.”

There have been initiatives in the past like this that have helped a collapsed housing market. In 2008 during the financial crisis, many home buyers who had bought their homes just before or during the housing market collapse found themselves upside down on their mortgages. This means that they owed more on the mortgage than the home was worth.  Sometimes this difference was significant. This 2008 tax credit covered homes purchased between 2008 & July 2009 and allowed homebuyers to claim a credit up to 10% of the purchase price up to $7500. Approximately 1.5 million homeowners took advantage of this tax credit before it expiring in 2010.

At this point, there are already many other tax benefits to owning a home. This deduction can be taken if you decide to itemize on a Schedule A. Remember from earlier since the 2017 Tax Act almost doubling the standard deduction it may not be beneficial to itemize. But if you choose to itemize this deduction can apply to any mortgage insurance paid. This is a deduction, not a credit so this would be a reduction in the taxable income.  This would obviously reduce the overall tax but unlike the credit, it is not a direct reduction of the tax debt

This tax deduction applies to any mortgage insurance you paid from a conventional loan or one backed by a government agency like an FHA loan. You can also deduct the funding fee from a mortgage-backed from the Department of Veteran Affairs. You can also deduct mortgage interest on your federal tax return. If filing married filing jointly you can claim interest paid up to $1 million if the loan was originated before 2017. If originated after 2017, you can deduct the mortgage interest up to $750,000 for MFJ and $375,000 if filing single or separately. 


Tax Credits Related to Energy Efficiency

Property tax and any state income tax are also deductible. You may deduct up to $10,000 of state and local taxes from your federal taxable income. There are also renewable energy tax credits. If you have made upgrades to your home that have improved their energy efficiency you may claim credit for 10% of the cost of the qualified energy efficiency improvement. As detailed on the IRS website, qualified energy efficiency improvements include the following products:

  •       Energy-efficient exterior windows, doors, and skylights
  •       Roofs (metal or asphalt) and roof products
  •       Insulation

Residential energy property expenditures include the following qualifying products:

  •       Energy efficient heating and air conditioning systems
  •       Water heaters (natural gas, propane, or oil)
  •       Biomass stoves

Other Programs That Could Benefit First-Time Homebuyers

Each state has its own versions of the first-time buyer programs as well. Many of these programs were created in the 1980s to encourage homeownership. New Jersey for example provides down payment assistance to first-time buyers. This program provides $10,000 towards a down payment and closing costs. New Hampshire offers a Mortgage tax credit which helps reduce taxable income. This can save you thousands yearly on federal taxes owed.

If the bill is passed this new credit could be available as early as next year. It still has a hard road to go to become law but if passed the legislation would make 10% of the nation’s renters about 4.37 million people eligible for down payment assistance. As quoted on Yahoo Finance Sunny Shaw, the president of the National Association of Housing and Redevelopment says, “The refundable tax credit proposed in the bill would increase homeownership among low- and moderate-income Americans, especially those from marginalized communities with historically low homeownership rates.”

The hope is that this assistance could help stimulate minority homeownership. There are still other hurdles that must be passed to enter homeownership and benefit from the tax credit. The two major qualifiers to obtain a mortgage to pay for the property after a down payment are income and credit. A lot of renters may not be positioned to qualify for the mortgage even if a down payment is provided. 

Also, people can only benefit from the credit if there is affordable housing in their area. Currently, there is such competition and tight inventory that homes are selling at a historically quick pace and extremely high prices. If you can’t qualify for a mortgage or there aren’t homes available for sale in your price range, then these programs unfortunately are of no benefit to you. This may be the case for many aspiring homeowners.

In conclusion, this new tax credit if passed will provide many the ability to purchase a property and take advantage of the low-interest rates and the stability of homeownership. If you are one of these people who have always wanted to buy but found it impossible to set money aside for the expected down payment on a property, then definitely follow this through the law-making process. If approved make sure you reach out to a certified tax professional, either an enrolled agent or CPA to make sure to get all the benefits from these programs.


The Child Tax Credit: Do I Qualify & How Does It Benefit Me?

a Hispanic mother and her young son

With the current economic situation, there have been many different programs added and changes made to existing benefits to help provide for families. One major change was to the Child Tax Credit. With the most recent $1.9 million American Rescue Plan presented by President Joe Biden, this credit has been temporarily increased for the 2021 tax year. 

This article will explain the Child Tax Credit, how it works, and how it has changed over time up until the point of these new major changes. Once the history of the credit is understood we can further explore the changes that have been made with the American Rescue plan and how they may benefit you and our economy.

The Origin of the Child Tax Credit

The credit itself is not something completely new. This is a credit that has been around since 1998. It was originally introduced by 1997 legislation and was first available to taxpayers to be used in 1998. It started as a $500-per child non-refundable credit to taxpayers but has steadily increased over the past 20 years. In the beginning, this was a nonrefundable credit generally available to the middle and upper class. The changes over the years have not only increased the amount of the credit but it has also made it available to lower-income families.

The biggest increase before The American Rescue Plan was back in 2001. When Congress enacted the Economic Growth & Tax Act of 2001 it doubled the child tax credit to $1000 per child and made it partially refundable. The change from nonrefundable to refundable means that that if the amount of the credit exceeds income tax liability it would be added to the taxpayer’s refund. In prior years, the credit would be lost if it exceeded the income tax liability. 

Recent Changes

This year, the refundable Child Tax Credit (CTC) earnings threshold was set at $10,000 so families could now receive a subsidy for earnings above that amount. In 2017 tax law increased the maximum value of the Child Tax Credit from $1000 to $2000 per child.

There have also been changes over the years regarding who qualifies for this credit. Over the years key parameters of the credit have been changed, expanding the availability to more low-income families. With the 2017 increase, they also increased the income threshold at which the credit begins to phase out. In addition, the 2017 act also requires taxpayers to provide an SSN associated with each child. 

Failure to provide the child’s current social security number could result in the taxpayer being denied the credit. This helped cut down on the fraud that unfortunately was taking place regarding this credit, but it also ended the CTC being available for more than 1 million children lacking a social security number in low-income families.

The most recent changes within the American Rescue Plan have drastically changed the amount of the credit. It has been made more available to low-income families. It has become fully refundable, meaning families can receive the full excess amount as a refund. At his point, these changes are just temporary for the tax year of 2021. The Act increased the amount tax filers can claim up to $3600 for children under the age of 6 and up to $3000 per child ages 6 to 17. 

The Act also expanded the availability of the tax credit to millions of families who did not qualify before. In the past households had to earn $2500 in income and could only receive $1400 if the tax credit exceeds taxes owed. With the changes from the Act, families will qualify for the maximum credit regardless of how much they earned. This expansion of the credit makes it available to millions of families who did not qualify before.

As seen on NBC, Kris Cox the deputy director of federal tax policy at the Center on Budget and Policy Priorities said that some 27 million children, including half of Black and Latino children because their families did not earn enough. She said the poorest children have been getting the least from this credit she added that “this bill is completely historic because it would shift that and make sure that low-income children receive the full credit. The expansion would lift millions of children above the poverty line.

Who Qualify for the Child Tax Credit?

Not all families with children will qualify for the higher child tax credit. The enhanced tax break begins to phase out at adjusted gross incomes of $75,000 on single returns, $112,500 on the head of household returns, and $150,000 on joint returns. The amount of credit is reduced by $50 for each $1000 of the adjusted gross income over the applicable threshold amount.

Another major difference will be the distribution of the credit. Typically, the child tax credit would be applied to income tax owed, or if it exceeds the amount owed portions of it would be disbursed through a tax refund. With the American Rescue Plan half of the amount that you qualify for will be distributed by the IRS as monthly payments between July and December. You will receive the second half when you file your 2021 tax return next spring.  This means up to $300 a month per eligible child under 6 and up to $250 per month for each eligible child between 6 & 17 years old. 

The IRS has said it will begin sending payments on July 15th. These payments will be based on a taxpayer’s 2020 return or the 2019 return if 2020 has not been filed yet.

With all these changes made and such extra benefit being provided it is important to know who qualifies for the Child Care Tax Credit. At this point anybody with a qualified child dependent below $75,000 income for individuals and married couples below $150,000 income. The big question is what qualifies a child as a qualifying child dependent. 

A qualifying child dependent is a child who meets the IRS requirements to be your dependent for tax purposes. They do not have to be your child, but the qualifying child must be related to you.

A qualifying child is a child whose relationship to you meets five qualifying tests for relationship type, age, residency, support, and joint return.

  • To pass the relationship test the child must be a son, daughter, stepchild, foster child, brother, sister, half-sister, half-brother, stepbrother, stepsister, or a descendant of any of them.  
  • To pass the age test the child must be younger than the taxpayer (or spouse if filing jointly) They must be younger than 19 at the end of the year if not in school and younger than 24 at the end of the year if they are a full-time student. They can be any age if permanently and completely disabled and if this is the situation, they do not have to be younger than the taxpayer.
  • To pass the residency test the child must live with the taxpayer more than half of the year. A child who is born or dies during the year qualifies if the home was the child’s home the entire time the child was alive. A child is considered to live with a taxpayer when at the hospital following birth, or temporary absences due to special circumstances such as illness, education, business, vacation, or military service.
  • To pass the support test the taxpayer must provide more than half of their support.

So, if the child meets these requirements in relation to the taxpayer, they will qualify to add them as a qualified child dependent on the tax return and get the benefits of the increased Child Tax Credit for the 2021 tax year.  

One of the major questions of taxpayers and other politicians is how these credits and additional increases in spending going to be paid for.  There is a major proposal in play to make a significant spending increase in the IRS collections process. They feel this investment will produce 10 times the revenue than the initial needed investment. Please check out my next article about how IRS enforcement will soon get a major boost.

Other Tax Credits That You Might Qualify For

In conclusion, with these major changes to the Child Tax Credit, there is a major benefit of filing correctly. If you do not qualify for the Child Tax Credit, then there many more credits that can be utilized on a tax return. The Earned Income Credit or the qualifying relative credit are good examples of these.  

The American Rescue Plan also added some more credits other than this one that did not exist in tax law in previous years. A good example of this would be the 2020 Recovery Rebate Credit. This will help people claim credit for missed stimulus check payments. 

They are also pushing to extend the new benefits of the Child Tax Credit into future years as well. With this said with all the different credits and deductions being added and changing every year it is so important to get the right tax professional to assist you in your filings. 

Always look for somebody reputable who holds a licensing that backs up their education. CPAs and IRS Enrolled Agents are the ones that have the level of education to maximize and use everything within tax law to save you money.