Eligibility: The tax credit is now available for first-time home buyers and select homeowners. A first-time home buyer is defined as an individual who has not owned a principal residence during the three year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, consumers should note that ownership of a vacation home or rental property not used as a principal residence does NOT disqualify a buyer as a first-time home buyer.

A qualified homeowner is defined as someone who has owned and resided in a home for at least five consecutive years within the last eight.

The maximum credit amount for first-time home buyers is $8,000; the maximum credit amount for current homeowners is $6,500. The federal tax credit amounts to 10 percent of the cost of the home, up to a maximum credit of $8,000 for first-time homebuyers and $6,500 for current homeowners. Under the new legislation, a tax credit may only be awarded on homes purchased for $800,000 or less.

e.g., If a home costs $60,000, the allowable credit for both a first-time homebuyer and a current homeowner would be $6,000. If a home costs between $80,000 and $800,000, then the allowable credit for a first-time homebuyer would be $8,000 and for a current homeowner, $6,500.

Single taxpayers with incomes up to $125,000 and married couples with a joint income up to $225,000 qualify for the full tax credit. Individuals whose Form 1040 filing status is “single” are eligible for the tax credit if their income is no more than $125,000. Individuals who file a joint return are eligible if they have no more than $225,000 in income.

Single taxpayers who earn between $125,000 and $145,000, and married couples who earn between $225,000 and $245,000 are eligible to receive a partial credit. Individuals with incomes greater than $145,000 (single) and $245,000 (joint return) are not eligible for this tax credit at all.

The tax credit is refundable. A refundable credit means that if the amount of income taxes a home buyer owes is less than the credit amount he / she qualifies for, the government will send a check for the difference. In essence, the credit is a dollar-for-dollar reduction in what taxpayers owe for the calendar year following the year they close on their home.

e.g., A first-time home buyer who qualifies for the full $8,000 tax credit and owes $5,000 in federal income taxes would owe nothing to the IRS and receive a $3,000 payment from the government. A current homeowner who qualifies for the full $6,500 tax credit and owes $5,000 would pay nothing to the IRS and receive $1,500 back from the government. If the move-up buyer is due to get a $1,000 refund, he / she would get $7,500 ($1,000 plus the $6,500 move-up buyer tax credit).