Tax Credit or Deduction, What’s the Difference?

With the buzz about President Obama extending the First Time Homebuyer’s Tax Credit you may be wondering what can this do for you?

First you have to understand the difference between a tax credit and a tax deduction. A deduction takes away money from your taxable income. For instance, if you are in the 25% tax bracket a $2000 deduction reduces your tax bill by $500. When qualifying for a tax credit, in this case it’s the $8000 first time homebuyer’s credit, it will lower your tax bill by the full $8000, regardless of what tax bracket you’re in. This is one example of how a credit works, say you file your taxes and your liability to Uncle Sam is $4,000. You have had the $4,000 withheld from your paycheck weekly through your employer. You have paid your taxes in full throughout the year. Now comes the good part, you file your taxes owing zero to the IRS, you would then get the tax credit as a refund.

The credit is capped at $8000 or 10% of the home’s value, whichever is less. For example, if you purchased a home for $50,000 your tax credit would be $5,000. Any home purchased between $80,000 and $800,000 will qualify for the full $8000 credit subject to your eligibility.

Buyers looking to purchase in the Indianapolis real estate market are at an advantage. Home prices are very competitive in central Indiana allowing real estate buyers to get more home for their money. Coupled with the opportunity to receive an $8000 tax credit along with affordable home prices is a win-win situation for buyers. Sellers are now included in the opportunity to receive a credit when they sell their primary residence and purchase another. Certain stipulations do apply to sellers. Contact your local Indianapolis real estate agent today to determine your qualification and find out how to take full advantage of the tax credit.