Clearing up the confusion about stimulus tax breaks


The American Recovery and Reinvestment Act is a month old today, but there is still a lot of confusion about the tax breaks.

Tax professionals have been answering readers' questions on the stimulus package on our consumer blog at

Here are answers to frequent questions:

First-time homebuyer credit This is worth 10 percent of the purchase price, up to a maximum credit of $8,000. To get it, you must buy a house between Jan. 1 through Nov. 30 this year. You cannot have owned a house in the prior three years. And the credit starts to phase out once income reaches $75,000 for singles and $150,000 for married couples filing jointly.

Many ask whether they will be eligible if someone co-signs a loan for the house.

"The fact that you have a co-signer doesn't matter," says Cindy Hockenberry, research coordinator with the National Association of Tax Professionals. "Ultimately, you are still responsible for the debt."

And it doesn't matter whether your folks lend you the money to buy the house or if you find the cash on the street, she says.

What does matter, though, is that your name is on the deed and the house is your primary residence, she says.

Couples - married and not - often ask whether they can get the credit if one of them qualifies and the other doesn't.

That depends. If you're married, both spouses must qualify as a first-time homebuyer to get the credit. So if your new spouse owned a house in the past three years, you're out of luck.

But if an unmarried couple buys a house and one doesn't qualify as a first-time homebuyer, the other can claim the credit, Hockenberry says.

And if two friends buy a house together, they can decide how to reasonably split the credit, Hockenberry says.

Making Work Pay credit This will put up to an extra $400 this year and next in many workers' paychecks. Married couples are entitled up to $800, even if one spouse doesn't work, says Mark Luscombe, principal analyst with CCH, an Illinois provider of tax information.

The credit starts to disappear once income reaches $75,000 for singles, and $150,000 for joint filers.

The government has issued new tax withholding tables so that employers can start taking less money out of paychecks. Readers wondered whether workers could get into trouble later with the IRS for not having enough taxes withheld. That could trigger a penalty.

The new withholding tables should not be a problem for singles with one job, or a married couple where one spouse works, Luscombe says. But the IRS is concerned about under-withholding for individuals with multiple jobs and married couples, both of whom work, he says. All those employers would be reducing tax withholdings, possibly leading to not enough taxes withheld.

"The IRS suggests you revise your W-4 form to increase your withholding to counteract the effect of the revised withholding," Luscombe says.

One-time payment Those who don't work but receive Social Security, Supplemental Security Income, Railroad Retirement Benefits or Veterans Disability Compensation will be sent $250. But that money will be applied first to any back taxes, child support or debt you may owe to federal or state agencies.

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