Making the decision to purchase a home can be one of the most important decisions of your life. Purchasing a home is a long-term commitment and there are many incentives to being a homeowner. In addition to very low interest rates, another excellent benefit to buying a property now is the extended and expanded tax credit program.

On Nov. 6, President Obama signed into law the Worker, Homeownership and Business Act of 2009, which will allow the homebuyer current tax credit to be extended for another six months. The act also now includes existing homeowners as qualified for a tax credit.

The first important deadline in the new legislation that qualifies for a tax credit is a purchaser must have a signed purchase agreement in place by April 30th, 2010. The purchaser then has until July 1, 2010 to close on the home.

First-time homebuyers are still given the $8,000 tax credit, as was offered with the previous provisions. However, existing homeowners will be given a $6,500 tax credit, in addition.

According to the National Association of Realtors, the law stipulates that to qualify as a first-time homebuyer, a person must not have owned an interest in their principal residence anytime in the three years prior to purchasing a home. For married couples, neither spouse can have owned a home in the last three years.

An existing homeowner qualifying for the tax credit is defined as a person seeking to purchase a home who has used a home being sold as their principal residence consecutively for five of the last eight years.

Income constraints are also an important factor that qualifies homebuyers for the tax credit. A person filing as a single taxpayer may qualify as long as their income is less than $125,000. For people filing jointly, the income cap is $225,000.

There are also partial credits available for singles with incomes up to $145,000 and joint filers up to $245,000. The amount of a partial credit would need to be determined by a tax or accounting professional.

The new extension of the credit also further defined which homes would qualify for the tax credit. With the new legislation, any home purchased for less than $800,000 would qualify. The home must be used as a primary residence, and can not be purchased from a close relative. However, parents may co-sign a loan agreement for a child, so long as the child meets all other qualifications of the tax credit—and the child must not be claimed as a dependent by his or her parents to qualify for the credit.

The new legislation also provided for a new Anti-Fraud Rule, which will require homebuyers to provide documentation of the purchase of the home as an attachment to their tax return.

The tax credit incentive to homebuyers was first introduced in 2008, as a part of the Housing and Economic Recovery Act of 2008, then was extended into 2009 by means of the American Recovery and Reinvestment Act of 2009. The current provisions from the ARRA still apply to home purchases closing by Nov. 30 and the new stipulations will be effective Dec. 1. Lawmakers have indicated that the April 30th extension will likely be the last extension made of the tax credit.

Other key points addressed in the recently passed Workers, Homeownership and Business Act extended the amount of months displaced workers may claim unemployment benefits and provides an additional tax cut to struggling businesses.

Other important homeowner tax benefits
Another facet of the American Recovery and Reinvestment Act allows for another tax credit for homeowners who optimize their home’s energy-efficiency potential. There are two different types of credit offered for homes going green: the nonbusiness energy property credit and the residential energy efficient property credit.

The nonbusiness energy credit allows homeowners to earn a 30 percent credit on what they spend on energy-saving improvements with a maximum of a $1,500 credit. Types of expenses that qualify for this credit would be installing high-efficiency heating or cooling systems, biomass-burning stoves or hot water heaters, energy-efficient windows, skylights and doors, and certain insulation and roofs are included in the credit.

The residential energy efficient credit allows homeowners to earn a credit of 30 percent of costs spent on expenses on alternative energy improvements, with no maximum cost limit. Types of improvements that would be included to receive this credit include solar hot water heaters and electric systems, geothermal heat pumps, or wind turbines. For most improvements, the cost of labor can be included when calculating the cost.

To qualify, the improvements must be placed in service by the end of 2010. To claim this tax credit, homeowners need to fill out the Residential Energy Credits form, Form 5695 as an attachment to their tax return.

In addition to the new tax credits of recent years, homeowners are also allowed to deduct certain provisions from their yearly income. Such deductions include real property taxes (not including special assessments), discount points paid at closing, and certain moving expenses.

It is important to know the distinction between a tax deduction and a tax credit. A deduction lowers a person’s income as a percentage, either before or after determining their adjusted gross income. The actual amount of the deduction is determined by the tax bracket a person is a part of.

Tax credits, on the other hand, are a dollar-for-dollar reduction in the amount of taxes owed by an individual; or in the case where a person does not owe anything in taxes, is money given back directly to that individual.

Local, state and federal property taxes can all be deducted from a person’s taxable income. If discount points are paid at closing, a seller or buyer would be able to deduct the cost. Moving expenses may also qualify if they are unreimbursed expenses as a result of moving for a new job. The “new job” terminology is also applicable to self-employed persons.

In certain circumstances, mortgage interest may also be deductible for qualified homes. A tax expert should be able to determine all of the specifics regarding tax deductions for mortgage interest.