The new form and instructions follow major changes in November to the homebuyer credit by the Worker, Homeownership, and Business Assistance Act of 2009. The new law extended the credit to a broader range of home purchasers and added new documentation requirements to deter fraud and ensure taxpayers properly claim the credit.

With the release of Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, and the related instructions, eligible homebuyers can now start to file their 2009 tax returns. Taxpayers claiming the homebuyer credit must file a paper tax return because of the added documentation requirements.

The IRS expects to start processing 2009 tax returns claiming the homebuyer credit in mid-February after it completes the updating and testing of systems to meet the law’s new requirements. The updates allow the IRS to put in place critical systemic checks to deter fraud related to the homebuyer credit.

Some of these early taxpayers claiming the homebuyer credit may see tax refunds take an additional two to three weeks.

In addition to filling out a Form 5405, all eligible homebuyers must include with their 2009 tax returns one of the following documents in order to receive the credit:

• A copy of the settlement statement showing all parties’ names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.
• For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties’ names and signatures, property address, purchase price and date of purchase.
• For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.

In addition, the new law allows a long-time resident of the same main home to claim the homebuyer credit if they purchase a new principal residence. To qualify, eligible taxpayers must show that they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. The IRS has stepped up compliance checks involving the homebuyer credit, and it encouraged homebuyers claiming this part of the credit to avoid refund delays by attaching documentation covering the five-consecutive-year period:

• Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,
• Property tax records or
• Homeowner’s insurance records.

The IRS also reminded homebuyers that the new documentation requirements mean that taxpayers claiming the credit cannot file electronically and must file paper returns. Taxpayers can still use IRS Free File to prepare their returns, but the returns must be printed out and sent to the IRS, along with all required documentation.

Normally, it takes about four to eight weeks to get a refund claimed on a complete and accurate paper return where all required documents are attached. For those homebuyers filing early, the IRS expects the first refunds based on the homebuyer credit will be issued toward the end of March.

The IRS encourages taxpayers to use direct deposit to speed their refund. In addition, taxpayers can use Where’s My Refund? on IRS.gov to track the status of their refund.

More details on claiming the credit can be found in the instructions to Form 5405, as well as on the First-Time Homebuyer Credit page on IRS.gov.  If you have questions regarding the tax credit, income taxes or what forms you should file, please contact a qualified CPA or the IRS.

By JASON CLAYWORTH • jclayworth@dmreg.com • April 3, 2009

Low- and middle-income Iowans like Nikki Roe are far less likely than homeowners to benefit from proposed changes in the state’s tax laws.
Roe is a divorced mother with three children who works full time as a housing counselor at a Waterloo nonprofit group. She lives in and owns a mobile home but doesn’t itemize deductions on her tax returns.
Because of that, she has a greater possibility of joining more than 450,000 Iowans in the current tax year who would pay more if lawmakers end federal deductibility.

Almost 282,000 of those Iowans make less than $50,000, according to estimates from the Iowa Department of Revenue and Finance.
Those who would pay extra are more likely to be people who file simple tax returns and do not take deductions. Many times such people are renters or people like Roe who believe the lower value of their property isn’t worth the hassle of claiming deductions. They’re also more likely to be lower-income or recent high school and college graduates, said Mike Lipsman of the revenue department.
House File 807 will likely be debated next week in the Iowa House. It would end Iowans’ ability to subtract what they pay in federal taxes from their income when figuring their state taxes.

The bill also would reduce state income tax rates, offering low- and middle-income families the greatest breaks, Democrats say. The state would not take in extra money as a result, supporters say.
“Of course, with three kids, having more money in my pocket would be a huge benefit,” Roe said. “The more I have, the more I could provide for them.”
In addition, the proposal would increase the earned income tax credit.
Roe doesn’t know for sure how ending federal deductibility might affect her or the hundreds of people she helps in her job every year to avoid home foreclosures or bankruptcies.

Generally, individuals or families who make less than $125,000 per year would pay less in state income taxes. However, thousands of people in nearly every income category would pay more.
“It boils down to if you don’t itemize, you’re more likely to see your taxes go up,” Lipsman said.
Information from the Internal Revenue Service shows that of the 1,378,083 Iowans who filed taxes in 2006, 349,532 claimed a deduction for mortgage interest while 400,714 claimed a deduction for real estate taxes.

Rep. Tyler Olson, D-Cedar Rapids, and Rep. Thomas Sands, R-Columbus Junction, met with Des Moines Register reporters and editors on Thursday. Both acknowledged that the elimination of federal deductibility may not be as beneficial to families who don’t claim deductions.
Sands, like most of the members of his party, is opposed to the bill.
“Less than half of Iowans will see a benefit from this, whereas everyone else will either see no change or pay more to make up the difference,” Sands said, noting state revenue estimates.

Olson, who supports the bill, noted that two-thirds of Iowans would see either a tax decrease or no change at all.
“I’m hearing this hasn’t been thought through and we don’t know how this will affect taxpayers. I just totally disagree with that statement,” Olson said.
House Democrats decided to delay debate of the controversial proposal until next week, saying they were tweaking the bill. They declined, however, to go into details about what changes they are considering.

“If you make one single tweak to an area, it could have a $14 million or $15 million effect on your balance sheet one way or another,” said House Majority Leader Kevin McCarthy, D-Des Moines. “It’s very complicated.”
House Speaker Pat Murphy, D-Dubuque, hinted that the change would be in favor of giving more working families a bigger break.
“Our goal is to get as many people a tax cut with this, especially middle-class families,” Murphy said. “I’ll just tell you, we were ready to go on the bill but we’re working with the governor’s office to make sure he’s OK with every detail that’s in the bill.”

Some advocates for low-income Iowans urged residents Thursday to look at the bigger picture. Overall, more low- and middle-income families would win under the proposal, they said.
“It concerns me but, generally, in terms of good public policy, it’s good for Iowa,” said Victor Elias of the Iowa Fiscal Partnership, an Iowa City group that advocates for working families. “If you can help middle- and low-income families, then you’re helping the whole state.”