Housing Bailout, part 2, Congress makes tax code even more complicated
Posted by Mike Sylvester - 7/24/08 @ 8:06 pm - Filed Under National Politics
This is the second part of my post concerning the Housing Bailout, HB 3221. HB 3221 was passed by the House and will soon be passed by the Senate.
This post will focus on part of the bill; the part dealing with a “first time homebuyer credit;” which should actually be called a complicated interest free loan or an accountant and Internal Revenue Service job creation act.
Let me start by saying that our tax code is by far the most complicated in the world. Congress seems determined to make it more complicated each and every year. As most of you know I am a CPA and my profession benefits each time the tax code is made more complicated since it forces more people to hire a tax professional and since those tax professionals can charge higher fees as the work they perform for their clients becomes increasingly complicated.
I am against making the tax code more complicated because I think the tax code should be simple and easily understood by taxpayers…
With HB 3221 Congress is desperately trying to stimulate the US Housing Market. In its current form HB 3221 does quite a bit of tinkering with the tax code. This post will discuss the “tinkering” that I feel is the most egregious. The “first time homebuyer tax credit” is intended to make first time home buyers leap into the housing market by giving those tax payers a large cash infusion when they file their next annual tax return.
First time home owners are will now get a fully refundable Federal tax credit (actually an interest free loan) in certain circumstances. A first time homebuyer is a taxpayer who did not have an ownership interest in a principal residence in the US during the three year period prior to the purchase of the home to which the credit applies. The “tax credit” is granted to first time homebuyers who purchase a house between April 9th, 2008 and June 30th, 2009. (Don’t worry, Congress will almost certainly extend this next year as they always do).
Taxpayers who meet the above two requirements will receive a refundable tax credit on their personal taxes filed for the year in question. This tax credit will be 10% of the purchase price of the home with a maximum tax credit of $7500. This tax credit will phase out for single taxpayers who make between $75,000 and $95,000; meaning those who have an adjusted gross income (AGI) of less then $75,000 get the full tax credit, those who have an AGI above $95,000 get no tax credit, and those in between get a partial tax credit. Married filers phase out between $150,000 and $170,000.
This is best shown with an example. Lets say Bob is married and he and his wife Sue buy a house in downtown Fort Wayne in order to be near the Harrison Square Project. Lets say Bob and Sue were traditional college students and lived in dorms for the last four years and did not own a house in the last three years. Lets say Bob and Sue have a total AGI of $50,000 per year. Lets say they purchase a house for $100,000 on July 25th, 2008. This means they will qualify for a refundable tax credit of $7500 on their 2008 tax return which must be filed by April 15th, 2009. Lets say they have their taxes prepared by SBS CPA Group (My company) and they are due a Federal refund of $3000 without considering this tax credit. Since they qualify for the $7500 tax credit the IRS will send them a tax refund of $10,500 ($3000 + $7500). Congress hopes Bob and Sue will then turn around and spend this money in Fort Wayne to spur the local economy…
Now is where it gets much more complicated for the taxpayers who qualify for this tax credit; because, it is not really a tax credit at all, instead it is an interest free loan courtesy of Congress via the Internal Revenue Service.
The tax credit must be paid back to the IRS ratably over fifteen years with no interest charge beginning in the second taxable year after the taxable year in which the home was purchased.
This is best shown using the example of Bob and Sue above. Bob and Sue will have to pay $500 per year back to the Internal Revenue Service starting in the year 2010 and ending in the year 2024. In each of these years they will have to fill out an additional form and file it with their taxes. Lets say that SBS CPA Group prepares their 2010 taxes in early 2011. Lets say not including their payback of part of the “tax credit”to the IRS they would have received a Federal refund of $3000. Then we would take their refund due ($3000) and subtract the $500 they owe the IRS and they would instead get back a Federal refund of $2500.
But wait, it gets even more complicated…
If the taxpayer sells the home or the home ever ceases to be the primary residence of the the taxpayer or the taxpayers spouse prior to complete repayment of the tax credit, any remaining tax credit repayment amount is due on the tax return for the year the home is sold or ceases to be used as the principle residence. However, the credit repayment amount may not exceed the gain from the sale of the residence to an unrelated person. No amount is recaptured after the death of a taxpayer. In the case of a transfer of the residence to a spouse or to a former spouse incident to divorce, the transferee spouse (Not the transferor spouse) will be responsible for any future recapture.
The above section is long and complicated and will be litigated in court for sure since there is room for abuse. This section is best looked at with our example of Bob and Sue.
If Bob and Sue live happy lives in their house near Harrison Square until 2025 or beyond then they will simply pay $500 back to the IRS via their personal tax return for tax years 2010 - 2024.
If Bob and Sue are killed in a car crash in October of 2009 then the IRS will never be paid back the $7500 interest free loan at all.
If Sue gets a great job offer in Arizona in 2009 they may decide to sell their house near Harrison Square. Assuming they sell the house for $90,000 there is no gain on the sale of their house and the IRS will never be paid back the $7500 interest free loan. Assuming the house is sold for $110,000 then there is a $10,000 gain on the house and Bob and Sue will payback the entire $7500 credit back to the IRS when they file their 2009 tax return in early 2010. (So they better have that money saved and available to pay Uncle Sam) In this case the IRS would have basically given Bob and Sue $7500 in early 2009 and then in early 2010 Bob and Sue would send that money right back to the IRS.
Lets say Bob and Sue are living in Fort Wayne and they decide to get divorced. Lets say they get divorced in 2009. Lets say in the divorce settlement Sue gets the house and Bob gets their other assets. In this case Sue now owes the IRS $7500 and she will pay them back $500 per year over fifteen years as long as the house is her primary residence.
This has got to be one of the dumbest schemes I have ever seen Congress come up with. Some of my reasons for disagreeing with this “tax credit” are:
1. The Congressional Budget Office has estimated that this modification of the tax code will cost the taxpayers 4.853 billion dollars over the next ten years. This cost will be added to the National Debt and it will have to be paid back with interest. This cost assumes that the program will not be extended past June 30th, 2009 and we all know how doubtful that is… Please remember the Democrats suspended the “pay-asyou-go-rules” for HB 3221 since it is so important in their opinion that the cost should just be added to the Federal Debt. Basically the Federal Government is giving certain taxpayers an interest free loan and it is borrowing money by selling US Treasuries in order to get the money to finance that interest free loan… Only Congress could come up with something that stupid.
2. It makes the tax code even more complicated and will not in any way benefit this country in my opinion. I cannot imagine any reasonable person would ever go and purchase a house just so they could get an interest free loan for the government during the following year.
3. The IRS will have a difficult time tracking the repayments as will taxpayers and their tax preparers and accountants. This is going to get abused and will cause us to have to hire more IRS agents in order to track the payback system.
Provisions like this really increase my blood pressure.
Is there ANYONE reading this post who thinks that this specific provision of the Housing Bailout Bill is a good provision?
Really, I am looking for just one person…
Please let me know what you think in the comment section.
Mike Sylvester
Comments
6 Responses to “Housing Bailout, part 2, Congress makes tax code even more complicated”
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Mike,
I think the biggest disagreement between you and Congress comes from your second bullet point:
I disagree with you on this one point. I think this will push many people who are considering purchasing a house into doing so before the deadline. I remember back when I was thinking of purchasing a home and if this would’ve been an option then that would’ve tipped the scales quite heavily towards purchasing the house.
I tend to agree with you in general on the complications involved but the goal was to try and stimulate the housing market and I think this will have a positive effect in that regard.
Of course I should also state that I think it’s poor public policy for the federal government to push so hard for home ownership. I think the current housing debacle is the blowback from years of promoting this poor policy.
There are other parts of this bill I have much more trouble with than this. Specifically the bailout of Fannie Mae and Freddie Mac shareholders…
And yet, more than 95% of these people in Congress will be re-elected this coming November. It’s always the other 484 Congressmen or 98 Senators that are the idiots. Not mine.
It just boggles my mind that nobody in Congress can stand up and show the idiocy of these kinds of policies.
There you are! The answer to more employment due to Harrison Square. More IRS agents to go after the unfortunate folks that fall for this “spend now, pay later” legislation. Better wages for the CPA community, yet another contributor to the need to bail out mortgage companies.
Can you say “Dumb and Dumber”?
Your examples (Bob & Sue) are my son and daughter almost to a T . . . Chris and Megan finish grad school on August 15th and both start jobs on Sept. 1st. They have never owned a home and will qualify for the “credit” as written.
My biggest beef with the legislation is that it doesn’t help the young couple on the front side . . . The downpayment. That $7500, if taken off the closing statement, would go a lot further toward getting 1st timers into a home. With each working good jobs, making the payments isn’t going to be the challenge, having the downpayment is . . . Very instuctive article Mike, thanks!
Every where I look I see that the tax credit is an interest free loan; howver, the bill says (in summary) “the tax imposed shall be increased by 6 2/2% for each taxable year in the recapture period” So, my question, is the loan interest-free?
Bill,
I have not seen the line you copied into your comment when I have reviewed the fiscal summaries of the bill!
Mike Sylvester