By Megan Doyle | American Express Credit Intel Freelance Contributor
5 Min Read | July 13, 2020 in Life
The First-Time Home Buyer Tax Credit no longer exists, but there are several ways you can save money on your taxes as a new homeowner.
If you plan to buy a house, check with your state or local government to see if there are any tax benefits you can use.
In addition to tax credits and deductions, state-sponsored first-time home buyer programs and savings accounts can help you save money.
I’ll skip the spiel about millennials' low homeownership rates compared to previous generations. Buying a house in today’s market can be expensive, no matter who you are. Fortunately, the government (federal, state, and local) incentivizes homeownership by offering tax breaks and credits for first-time home buyers. But before I lay out some of the tax advantages for new homeowners, let’s get one common misconception out of the way:
When it comes to federal taxes, there is no tax credit specifically designed for first-time homebuyers. If you’re certain you recall a substantial tax credit for new homeowners, you might be thinking of the gone-but-not-forgotten First-Time Home Buyer Tax Credit, which ended in 2010.
The First-Time Home Buyer Tax Credit was enacted in response to the 2008 financial crisis, as part of the Housing and Economic Recovery Act (HERA) aimed to help Americans buy homes. First-time homeowners under a certain income limit were able to receive a fully refundable tax credit of 10% of the purchase price of the home, but the max refund was a little different depending on which year the house was purchased.1
If you purchased a home in 2008, you could receive up to a $7,500 credit that had to be paid back within 15 years, without interest.2 If you purchased a home in 2009, 2010, or even early 2011, you could receive a refundable tax credit of up to $8,000—and it didn’t have to be repaid. Though this generous tax credit no longer exists, thousands of people still seek information about it every month.
The good news is that there are some other federal tax credits new homeowners can take advantage of. The only downside is that they’re a bit more specific—and perhaps less generous—than the First-Time Home Buyer Tax Credit. That doesn’t mean they’re not worth it, you’ll probably just have to meet certain requirements beyond being a first-time home owner within a certain income range.
Mortgage Interest Credit. The mortgage interest credit is a federal tax credit available to homeowners who were issued a Mortgage Credit Certificate (MCC) from their local government.3 MCC’s are made to help first-time homebuyers with lower income afford home ownership.
The credit lets new homeowners convert up to $2,000 of the mortgage interest they paid in a given year into a nonrefundable tax credit. If you paid more than $2,000 in mortgage interest in your tax year, whatever remains can still be itemized and deducted from your taxable income—but you’ll have to be sure to reduce your deduction by the amount you were credited.
To be eligible for the mortgage interest credit, you must be a first-time home buyer, use the home as your primary residence, and meet certain purchase price and income restrictions. Figuring out the amount of your credit requires some math, which is detailed on the website of the National Council of State Housing Agencies (see article source 3, below).
Residential Energy Credits. There are two residential energy credits available when filing your federal taxes:
Some states offer tax credits and other incentives so you can further reduce your tax burden as a new homeowner.
State and local tax credits. Common homeowner tax credits from state and local governments include renewable energy tax credits (in addition to the available federal renewable energy tax credits) and property tax relief credits. Every state is different, so be sure to check with your government office or a tax professional to find which tax credits you might be eligible for.
First-time home buyer savings accounts. These state-authorized accounts let individuals contribute to a savings account designated for buying a house. Yearly contributions are deductible on state returns, similar to an IRA deduction.5 As of April 2019, 11 U.S. states offered homeowner savings accounts: Alabama, Colorado, Iowa, Minnesota, Mississippi, Missouri, Montana, Oklahoma, Oregon, Virginia, and Wyoming.6
First-time home buyer programs. All 50 states (plus Washington D.C.) offer first-time home buyer programs to help make buying a house more affordable. While they may not offer tax benefits, these programs usually provide grants, loans, and/or financial assistance for closing costs or down payments. But programs will vary by state, so be sure to look into your state or local government’s details for any important terms and restrictions.
Tax credits aren’t the only way to save money as a homeowner—there are plenty of tax deductions available that can save you thousands of dollars every year. The catch is that these deductions will make your taxes a bit more complex, and they might not be worth it if they don’t add up to more than the standard deduction that you’d otherwise get automatically. Some of the most common tax deductions for homeowners include:
For more information, read “7 Top Tax Deductions for Homeowners.”
The First-Time Home Buyer Tax Credit was a generous, short-lived tax credit that helped Americans buy a house after the 2008 recession. Today, there are several other federal and state incentives that help new homeowners save money on taxes, down payments, and more.
3 “Mortgage Credit Certificate Program Q&A,” National Council of State Housing Agencies
4 Instructions for Form 5695, IRS
6 “Oklahoma Approves Home Buyer Savings Accounts,” Realtor Magazine