Rebuilding after bankruptcy? Understand the First Time Homebuyer Tax Credit

The economic recovery packages rolled-out by the federal government are providing a lot of people in the midst of rebuilding their financial livelihood a chance to get back on track even faster. For those who are underway with getting back on their feet after a successful bankruptcy, today's housing market, in conjunction with the First Time Buyer Tax Credit, is offering home ownership opportunities not seen in a long time.

Here's a breakdown of how the homebuyer tax credit shakes out:

You are eligible for the tax credit if it has been three years since you owned a home. This is ideal for those who may have lost a home through foreclosure or decided to sell to reduce their monthly mortgage commitments before bankruptcy. You must close on the home before December 1 of this year. (However, there is very good chance the government will extend that deadline.)

The amount of the tax credit is based on 10 percent of the home's purchase price to a maximum credit of $8,000. It is important to understand that there are limits on income, too. This means that you need to make less than $75,000 individually or $150,000 if filing jointly to be eligible.

In the tax credit's current form, it does not have to be repaid. This makes it different than the tax incentive that was in place during 2008. The credit is claimed on your federal income tax return, specifically form 5405. Since we're not accounting professionals, it would be best to consult a tax expert to understand the specifics relative to the paperwork. However, it seems that for once, the IRS has made that component of the process pretty simple.

Here is a quick tax lesson: A tax credit differs from a tax deduction. A credit is a dollar-by-dollar decrease in what you owe. A tax deduction is a figure taken away from the amount of income that is taxed.

You may have heard that the department of Housing and Urban Development (HUD) has announced that it will "monetize" the tax credit. This entails the ability to apply the maximum credit for which you are eligible to the home purchase right away instead of waiting until your tax return to claim the refund. This requires you to borrow with an FHA-insured mortgage, however. Don't let that dissuade you though, as FHA-insured mortgages are very common.

If you choose to take advantage of the credit in this manner, nonprofit lenders and others that are FHA-approved will be allowed to offer up to the $8,000 limit as a short-term loan.

Another nice advantage of the first time homebuyer tax credit is that you can apply it to your 2008 tax returns. The law says that a home purchase in 2009 can be treated as if it was bought in 2008, meaning that your income from 2008 will be used to determine eligibility and that it accelerates when the credit can be claimed.

The tax credit seems to be creating a real boost for the economy as a whole, as home buying has bounced back in the last couple of months. The IRS stated that close to 1.1 million people have applied for the tax credit through amended returns and more should do so come April of 2010.

As mentioned earlier, your best source for the real nitty gritty on this tax credit is a certified tax professional. We believe it help a number of clients get a leg up on their life after bankruptcy.

From the Law Offices of John T. Orcutt. Call +1-833-627-0115 for a free debt consultation and get on the fast track to real financial recovery.