Posts Tagged ‘tax credit’

Stimulus Bill 2.0 & Taxpayers Tax Credits and more – Part 2

April 15th, 2009 Vijaianand

Last week, I started the blog series on Stimulus 2.0 Tax credits. I talked about the first and foremost Tax credit which tax payers should take advantage in their 2009 and 2010 paychecks. Next is the Home and Car Buyer Tax credit.

Home Buyers Tax Credit

To boost the housing and auto industry, this 2nd stimulus package has come out with modest tax break for New home buyers and car buyers.

If you’re in the market for a new car or your first house, the compromise stimulus bill offers modest tax breaks for both kinds of purchases.


First-time home buyers would receive an $8,000 tax credit or upto 10% of their home value, and they wouldn’t have to repay the government later as is required for the last stimulus bill $7,500 credit if they stay in that home for 36 months at least. An earlier Senate proposal would have provided all home buyers with a $15,000 credit which was later cut down to $8000.


According Mark Zandi of Moody’s Economy.com to USATODAY.COM, The home buyer tax credit is a plus for the housing market, but only a small plus.”. “The credit … covers only a part of the down payment needed to make a purchase.


The housing market will take any help it can get, but it needs more.” Other economists point out that the tax credit will still provide a mild jolt to the market by encouraging home purchases, which in turn should help curb the rapid rate of home price declines. It is expected to induce more home sales in 2009 and this will be an important support for the housing market and the housing industry. It should also buffer the rate of decline of home prices.


Vijai’s 2cents:


A tricky tax credit to tackle the new home supply and demand problem in a way to stabilize the housing industry. As the demand increase and supply decrease, the price equilibrium should shift upwards stabilizing the drop in home sales. It is a good tax credit to help many tax payers who been thinking about getting a new home. People who have a home in their to get list is now thinking about really getting one with free money coming from government. It comes with few caveats.


Caveats:

1. It is either $8000 or 10% of your home purchase price. If you buy a home for the value $100k, you can only claim the maximum of $8000.

2. It is only applicable for first time home buyers whether you are single or married who never owned a primary residence in the past 36 months.
 
3. Only homes purchased on or after January 1, 2009 and before December 1, 2009 are eligible.

4.The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return.

5. It is a tax credit you can either claim this in 2008 return by filing an extension if you already filed 2008 return or you can file in 2009 tax return.


I see lot of people wanting to use this $8000 asking for suggestions in many finance forums. I am telling them, Don’t rush it. If you are getting something for free, it doesn’t mean you have to risk your financial health. It is similar to having a pill for a temporary relief without considering the longer term side effects.


Please don’t rush into getting a home whether are qualified easily with a good credit score or not. Take your time, analyze your financial situation to decide whether you really can afford it in a long run.

Ask yourself some practical questions like,


1. Can I pay monthly mortgage and yearly insurance?
2. Do I have a steady job or expecting lay off?
3. Do I have a 3-6 months worth of funds to cover my expenses including mortgage?
4. am I ready to spend some extra dollars every month for home maintenance?


If you can answer these questions in a truthful way without convincing yourself, you might be able to use this credit to get a good home and help the economy.

Check out for more details at http://www.federalhousingtaxcredit.com/

Car Buyers Tax Credit


This bill would allow new car buyers to deduct the purchase’s sales tax from taxable income.  But Ever-increasing credit score requirements by lenders, and slipping consumer credit ratings take many potential buyers out of the pool as per many analyst.


Vijai’s 2cents:

We all know US auto industry is a total mess. General Motors, largest of all in the verge of announcing bankruptcy and becoming Government Motors. With this bill,  Government is hoping to help the auto industry in large by increasing the sales.

Let us say, if you are getting new car which is $25,000 and trading in your old own for $10,000. Most states typically tax the difference of price which is $15,000. A 8.25%  sales tax in the Houston, Texas would be $1238. It is amount that would be reduced in your taxable income. It is similar to $1238 refund from IRS which is a good junk of money.

Many of you might ask,  we already have this provision to deduct our sales taxes in Itemized deductions. What is the difference now? That is true. Texas and few others states don’t have income tax and we have the option to get our sales taxes deduced from Itemized deductions Sch – A but other state residents most likely use to deduct their Income taxes. But this bill is different. It is a tax credit not tax deduction and it is available for all the states and will reduce the taxable income. Check out the previous post to understand the difference between tax credit and tax deduction.

But real question, how many people are going to buy US made cars compared to foreign cars. I am not sure how this will really help US auto makers but it will surely help your pockets to put some money back. If you are thinking about getting a new car, this is the right time. You also don’t have to worry about getting a hybrid car to avail this credit because that is  totally different credit.

We will see Energy Tax credit and others in the next blog post.


Some content are taken and modified from usatoday.com

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Stimulus Bill 2.0 & Taxpayers Tax Credits and more – Part 1

April 7th, 2009 Vijaianand

America is been critised for all the recent bailouts to banks, insurance companies and auto makers. It is even called as Bailout nation these days. The 2 stimulus bills passed totalling apx 1.5 trillion feeding the bailouts are expected to tackle the malice created by subprime crisis. 

The recent stimulus package of 787 billions dollars which is in works is hope to slowly boost the economy in many different ways as per obama administration. Financial analyst say it will take atleast a year or two to know whether this new package really helped to stimulate the economy or not. 


The major diffference between the last stimulus package compared to this new one is gradual and slow infusion of money to the economy. Because Bush adminstration failed to boost economy by sending tax rebate cheques to tax payers and it really didn’t help. So this new stimulus bill will not quickly solve the historic problems besetting the economy, but it could reduce the damage by adding jobs, infusing money gradually thru tax credits and same time providing relief for the unemployed and the uninsured.

Lets first understand what is Tax credit and see what are various tax credits which many of us can take advantage from this stimulus package 2.0

What is a Tax credit?

A tax credit is a dollar for dollar reduction in your income taxes. If you have a $1000 tax credit, you will pay $1000 less tax that year regardless of your tax bracket. A good example is the hybrid vehicle credit, if you purchase one you can deduct the amount directly from the taxes you owe. If you owe $2500 US Dollars in taxes and you have a $2000 USD tax credit, you subtract that credit directly from $2500 USD, reducing total taxes owed to $500 USD.


Difference btw Tax Credit and Tax Deduction

It’s important to understand the distinctions between a tax credit and a tax deduction, since they are two different ways of reducing the total taxes you will pay. A tax credit lowers your tax bill dollar for dollar. A deduction shaves money off your taxable income, so the value depends on your tax bracket. If you’re in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter in which bracket you are.


What are various Tax credits announced in Stimulus 2.0?

1. New Tax Credit for tax payers upto $800
2. Firsttime Homebuyer Tax credit
3. Energy Tax credit and
4. Extended Unemployment Benefit


1. From Paycheck: A $400 to $800 credit for many taxpayers


A key element of the stimulus bill would provide most Americans with a tax credit of $400, or $800 for married couples. The tax credit would phase out for single taxpayers with adjusted gross incomes of $75,000 to $90,000 and married couples with AGI of $150,000 to $190,000.


The tax credit would increase the average taxpayer’s paycheck by about $8 a week, prompting some to question whether it will do much to stimulate consumer spending. But for a single worker, the credit is the equivalent of a $500 salary increase, after taxes. In this economy, it is tough to get a hike and it will be even ridiculus to ask for one when lot of people don’t even have a job.

Instead of receiving a check from the government, most single taxpayers will see an adjustment to their tax withholding in their paychecks in 2009 and 2010, giving them about $45 extra per month for the rest of this year (married workers will receive an extra $65). If you’re self-employed, you can adjust your quarterly tax payments to benefit from the tax credit. Then you will claim the credit when you file your 2009 tax return next spring, bringing your tax bill in line with your reduced payments.

See Kiplinger article on How the Self-Employed Get Stimulus Money for the details.

Retirees who receive Social Security benefits and individuals on disability would receive a $250 tax credit. Because these individuals typically don’t have withholding, they’ll likely receive a check.

Vijai’s 2Cents: Don’t expect a rebate cheque this time. If you are employed, look out for a slight increase in your paycheck for 2009 and 2010 which can total to $400 (single) or $800(married) for each year. If you are self employed like me, you can either take the qtrly cut $100(single) or $200(married) from your estimated payment.

I already reduced my estimated payment for this quarter. This way you can save that money and earn some interest. If you don’t want to have the pain, just continue pay your estimated and when you file your return take the credit as a lumpsum. This way you miss out on interest for money you could have earned which is not big with 1-2% interest in savings account these days.

I will First time home buyer credit and other tax credits in my next blog post. Keep looking…

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Homeowner Affordability and Stability Plan – A Glance

March 30th, 2009 Vijaianand

On Feb 18, 2009, Obama Administration introduced  the Homeowner Affordability and Stability(HAS) Plan. It is designed in a motive to bring relief to homeowners struggling with their mortgage payments and to help prevent the negative effects of foreclosures on neighborhoods and communities.


As part of this plan, the U.S. Treasury Department has outlined a detail loan modification process to reduce the mortgage payments for at-risk customers and announced the plan details on Mar 4, 2009.


Here are some details about the Home Affordable Modification (HMP) program. 

  • Mortgage loans originated on or before January 1, 2009, are eligible for the HMP program, and the amount owed on the loan must be less than or equal to $729,750.
  • The program applies only to the primary residence. It does not apply to second homes or investment properties, and the house cannot be vacant or condemned.
  • To be considered for a loan modification under this program, homeowners are required to provide a hardship affidavit and proof of income.
  • Participating servicers and lenders must lower interest rates, extend loan terms, and/or forbear principal to reduce a customer’s mortgage payment. If the servicer or lender cuts the payment to 38% of the household’s monthly gross income, the Treasury Department will share the cost to further reduce the payment to 31%.
  • Eligible borrower must complete a 90-day trial modification period at the new interest rate and payment. If the customer is current at the end of the trial period, the servicer or lender will execute a permanent modification agreement.
  • The Treasury Department will pay servicers and lenders $1,000 for every loan modified under the program and another $1,000 a year for up to three years if the homeowner remains current on the loan.
  • Customers who make timely mortgage payments will also receive $1,000 a year for up to five years. This money must go toward reducing the principal balance on the loan.
  • Incentive payments will only be made after the customer successfully completes the trial period.
  • Loans can only be modified once under the program; redefaulting loans will be terminated from the program, and no additional incentive payments will be made.
  • Participating servicers and lenders are required to service all eligible loans under the program’s guidelines unless explicitly prohibited by existing investor contracts.


Vijai’s 2cents: Is HAS Plan really helpful?


There is always 2 sides to a story. On one side many are echoing, Home Affordable Modification program will help stabilize the housing and mortgage industries by making mortgage payments affordable for distressed homeownwers in a optimistic tone.


But on the other side they think it is just a short term solution and it is going to get the customer/borrower after 5 year modification period. It is not a true solution to help borrowers. Also not may homeowners who bought their house rightly and paying right on time are happy about the notion slackers are getting help.


Check out this article which found on the net talking about different views.


http://seekingalpha.com/article/124736-obama-s-homeowner-stability-plan-how-helpful-will-it-be


HAS Program Tools


If you want to know whether you are eligible for loan mod or refinance option thru this program, check out this website http://wwww.homeaffordplan.com and it will give the result.


Other websites to check are,


http://www.making-home-affordable.com
http://www.financialstability.gov


What do you think about this HAS Plan? Share your thoughts as comments.

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