A SIMPLE Retirement Plan for the Self-Employed

A SIMPLE Retirement Plan for the Self-Employed

Out of all the types of retirement plans available to small business owners, the SIMPLE plan is the easiest to setup and least expensive to manage.

These plans are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE plans work well for small business owners who don't want to spend time and high administration fees associated with more complex retirement plans.

SIMPLE plans really shine for self-employed business owners, here's why...

Self-employed business owners contribute both as employee and employer, with both contributions made from self-employment earnings.

SIMPLEs calculate contributions in two steps:

1. Employee out of salary contribution
The limit on this "elective deferral" is $11,500 in 2009, after which it can rise further with the cost of living.

Catch up. Owner-employees age 50 or over can make a further $2,500 deductible "catch up" contribution as employee in 2009.

2. Employer "matching" contribution
The employer match equals 3% of employee's earnings.

Example: An owner-employee age 50 or over in 2009 with self-employment earnings of $40,000 could contribute and deduct $11,500 as employee plus a further $2,500 employee catch up contribution, plus $1,200 (3% of $40,000) employer match, or a total of $15,200.

The SIMPLE plan is good for the home-based business and can be ideal for the moonlighter - the full-time employee, or the homemaker, with modest income from a sideline self-employment business.

With living expenses covered by your day job (or your spouse's job), you could be free to put all your sideline earnings, up to the ceiling, into SIMPLE retirement investments.

A Truly Simple Plan

The SIMPLE plan really is simpler to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules - in investment options, spousal rights, creditors' rights - don't have a lot new to learn.

Requirements for reporting to the IRS and other agencies are negligible. Your plan's custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit simpler than with other plans.

What's Not So Good About SIMPLEs

Other plans can do better than SIMPLE once self-employment earnings become significant.

Example: If you are under 50 with $50,000 of self-employment earnings in 2009, you could contribute $11,500 as employee to your SIMPLE plus a further 3% of $50,000 as an employer contribution, for a total of $13,000. A Keogh 401(k) plan would allow a $25,500 contribution.

With $100,000 of earnings, it would be a total of $14,500 with a SIMPLE and $35,500 with a 401(k).

Because investments are through an IRA, you're not in direct control. You must work through a financial or other institution acting as trustee or custodian, and will in practice have fewer investment options than if you were your own trustee, as you could be in a Keogh.

It won't work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with SEPs. Generally, to make a SIMPLE plan effective for a year it must be set up by October 1st of that year. A later date is allowed where the business is started after October 1; here the SIMPLE must be set up as soon thereafter as administratively feasible.

There's this problem if the SIMPLE is for a sideline business and you're in a 401(k) in another business or as an employee: The total amount you can put into the SIMPLE and the 401(k) combined can't be more than $16,500 (2009 amount)-$21,500 if catch up contributions are made to the 401(k) by one age 50 or over.

So someone under age 50 who puts $8,000 in her 401(k) can't put more than $8,500 in her SIMPLE, in 2009. The same limit applies if you have a SIMPLE while also contributing as an employee to a "403(b) annuity" (typically for government employees and teachers in public and private schools).

How to Get Started in a SIMPLE

You can set up a SIMPLE on your own by using IRS Form 5304-SIMPLE or 5305-SIMPLE, but most people turn to financial institutions.

SIMPLES are offered by the same financial institutions that offer IRAs and Keogh master plans.

You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement you will choose an "effective date" - the beginning date for payments out of salary or business earnings. That date can't be later than October 1 of the year you adopt the plan, except for a business formed after October 1st.

Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE. You need such an agreement even if you pay yourself business profits rather than salary.

Printed guidance on operating the SIMPLE may also be provided. You will also be establishing a SIMPLE IRA account for yourself as participant.

Keoghs, Seps and SIMPLES Compared

Keogh SEP SIMPLE Plan type: Can be defined benefit or defined contribution (profit-sharing or money purchase) Defined contribution only Defined contribution only Owner may have two or more plans of different types, including a SEP, currently or in the past Owner may have SEP and Keoghs Generally, SIMPLE is the only current plan Plan must be in existence by the end of the year for which contributions are made Plan can be set up later--if by the due date (with extensions) of the return for the year contributions are made Plan generally must be in existence by October 1st of the year for which contributions are made Dollar contribution ceiling (for 2009): $49,000 for defined contribution plan; no specific ceiling for defined benefit plan $49,000 $22,000 Percentage limit on contributions: 50% of earnings, for defined contribution plans(100% of earnings after contribution). Elective deferrals in 401(k) not subject to this limit. No percentage limit for defined benefit plan. 50% of earnings (100% of earnings after contribution). Elective deferrals in SEPs formed before 1997 not subject to this limit. 100% of earnings, up to $11,500 (for 2008) for contributions as employee; 3% of earnings, up to $11,500 for contributions as employer Deduction ceiling: For defined contribution, lesser of $49,000 or 20% of earnings (25% of earnings after contribution). 401(k) elective deferrals not subject to this limit. For defined benefit, net earnings. Lesser of $49,000 or 25% of eligible employee's compensation. Elective deferrals in SEPs formed before 1997 not subject to this limit. Same as percentage ceiling on SIMPLE contribution Catch up contribution 50 or over: Up to $5,500 in 2009 for 401(k)s Same for SEPs formed before 1997 Half the limit for Keoghs, SEPs (up to $2,750 in 2009) Prior years' service can count in computing contribution No No Investments: Wide investment opportunities. Owner may directly control investments. Somewhat narrower range of investments. Less direct control of investments. Same as SEP Withdrawals: Some limits on withdrawal before retirement age No withdrawal limits No withdrawal limits Permitted withdrawals before age 59 1/2 may still face 10% penalty Same as Keogh rule Same as Keogh rule except penalty is 25% in SIMPLE's first two years Spouse's rights: Federal law grants spouse certain rights in owner's plan No federal spousal rights No federal spousal rights Rollover allowed to another plan (Keogh or corporate), SEP or IRA, but not a SIMPLE. Same as Keogh rule Rollover after 2 years to another SIMPLE and to plans allowed under Keogh rule Some reporting duties are imposed, depending on plan type and amount of plan assets Few reporting duties Negligible reporting duties Please contact us if you are interested in exploring retirement plan options, including SIMPLE plans. Contact Us

How to Take the Pain Out of Paying Your Bills

How to Take the Pain Out of Paying Your Bills

Settle Up Fast with Quickbooks' Bill Paying Tools

Some of the financial crystal ball-types are telling us there are signs that the recession may be drawing some of its last breaths. But those bills are still coming in, and you may have had a long, dry summer and less income that you can use to meet those business obligations.

The desktop versions of QuickBooks can help. They can't magically make more money appear in your coffers, but they can help you manage your bills so you're always aware of what's coming up and don't get any nasty surprises. This keeps both you and your vendors happy, and minimizes the chance of affecting your credit report adversely. You can also maximize cash flow by being hyper-aware of when each bill is due and timing them appropriately.

(These bill-paying tools are available in all QuickBooks versions above Simple Start.)

Enter First, Then Pay

Of course, you can mimic your old manual method of bill paying by simply using QuickBooks' check-writing convention. But if you do this, you risk paying the bill twice. If you follow the process shown in Figure 1 by entering and the then paying, you'll ensure that you record the expense in the same period it occurred.

To start, click the Enter Bills or Vendors/Enter Bills icon. The Enter Bills dialog box opens as shown in Figure 2. If you received a bill, be sure that box in the upper right is checked, and that the Bill radio button is filled in.

Figure 1: You'll find these icons on QuickBooks' graphical flow chart.

Figure 2: The Enter Bills dialog box.

Next, click the arrow next to the Vendor line to select an existing vendor or add a new vendor. Change the date if necessary, and enter a reference number (this may avoid confusion later). Then, enter the amount due.

When you initially set up vendors, you either set up terms for each vendor or accepted the default. So the Terms field should already be filled in, and will generate the correct bill due date. Enter a descriptive memo in that field if you'd like.

Tip: Use the right-click menu when you're entering bills to see more options.

Since this was an expense, you'll want to record it as such. Make sure the Expenses tab is highlighted, and click in the Account field. Click the arrow that appears to drop down the list, and select the appropriate expense type. Fill in the rest of the field on the line, making sure to check the Billable box if this is something you can bill back to a customer. If the expense needs to be split into separate categories, create a new line and amount for each. Your bill now looks something like Figure 3.

Click the Items tab and fill out the fields there if your expense involves products. You must have Inventory turned on to do this. Click Save & Close or Save & New. QuickBooks now works in the background, increasing Accounts Payable and dropping the bill into several reports.

Figure 3: Make sure your completed bill entry screen is as complete as possible.

Paying Your Debts

When it's time to pony up, click on the Pay Bills icon, or click Vendors/Pay Bills. You'll see a screen similar to Figure 4. Check the radio button next to the correct preference to view all bills, or to limit the list to those on or before a specific date. Put a check mark next to the bill(s) you want to pay. The correct amount should fill in by default, but you can change this to make a partial payment.

If you want to view the bill, take a discount, or use credits, click on those buttons. Select a payment date, method (check or credit card), and toggle to the correct account if it's not showing.

Figure 4: The Pay Bills dialog box. Make sit easy to finish the job.

Once you've paid a bill, your Accounts Payable and checkbook balances decrease, and the vendor balance and reports are updated. QuickBooks stamps a PAID watermark on the bill to avoid confusion later on.

Tip: To find bills you've already paid, go to the Vendor Center.

So stop stacking your bills on an old spindle and ruffling through them every day to see what's due. You'll find that there are numerous benefits to using QuickBooks' bill-paying features, such as an improved credit rating, a dearth of past-due notices, and better cash flow.

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Increasing Your Income 1000% Formula

The Earned Income Tax Credit

The Earned Income Tax Credit

Millions of Americans forfeit critical tax relief each year by failing to claim the Earned Income Tax Credit, a federal tax credit for low-to-moderate income individuals who work. Taxpayers who qualify and claim the credit could owe less federal tax, owe no tax or even receive a refund.

This year it's even easier to determine whether you qualify for the EITC. The EITC Assistant, an interactive tool available on the IRS website, removes the guesswork from eligibility rules. Just answer a few simple questions about yourself, your children, your living situation and your income to find out if you qualify and estimate the amount of your EITC. You will see the results of your responses right away. Taxpayers, tax professionals, employers, community groups and public service organizations are encouraged to use the EITC assistant which is available in both English and Spanish.

Additionally, new for tax year 2009, is the added EITC and Income threshold for a THIRD qualifying child.

The EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. If you have children, they must meet the relationship, age and residency requirements. Additionally, you must file a tax return to claim the credit.

If you were employed for at least part of 2009 and at least age 25, but under age 65, you may be eligible for the EITC based on these general requirements:

• You earned less than $13,440 ($18,440 if married filing jointly) and did not have any qualifying children.

• You earned less than $35,463 ($40,463 if married filing jointly) and have one qualifying child.

• You earned less than $40,295 ($45,295 if married filing jointly) with two or more qualifying children.

• You earned less than $43,279 ($48,279 if married filing jointly) with third or more qualifying children.

Tax Year 2009 maximum credit:

• $5,657 with three or more qualifying children.
• $5,028 with two or more qualifying children;
• $3,043 with one Qualifying child;
• $457 with no qualifying children.

Note: Your investment income must be $3,100 or less for the year.

Note: The 2009 maximum Advanced Earned Income Tax Credit (AEITC) the employer is allowed to provide each of their employees is $1,826 per year.

Please call us for more information about the EITC, or see IRS Publication 596, Earned Income Credit, which contains eligibility criteria and instructions for claiming the tax credit.

Secrets of effective time management

The 7 Habits of Highly Effective People in Five Minutes or Less

Is Your Company a Hobby or a Business?

Is Your Company a Hobby or a Business?

Whether it is sewing, woodworking, fishing, gardening, stamp or coin collecting, millions of Americans participate in hobbies that may result in a profit. What are the tax implications of a hobby? When does a hobby become a business and how does that change the tax implications?

Definition of a Hobby vs Business

First, the IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity carried on with the reasonable expectation of earning a profit.

The tax considerations are different for each activity so it is important for taxpayers to properly determine whether an activity is engaged in for profit as a business, or is engaged in as a hobby.

Simply stated, you must report and pay tax on income from almost all sources, including hobbies. It is in the handling of expenses and losses that the two activities differ.

Note: Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the "hobby loss rule."

Is your hobby really an activity engaged in for profit?

If you are not sure whether you are running a business or simply enjoying a hobby, here are some of the factors you should consider:

• Does the time and effort put into the activity indicate an intention to make a profit?

• Do you depend on income from the activity?

• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?

• Have you changed methods of operation to improve profitability?

• Do you have the knowledge needed to carry on the activity as a successful business?

• Have you made a profit in similar activities in the past?

• Does the activity make a profit in some years?

• Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).

The IRS says that it looks at all facts when determining whether a hobby is for pleasure or business. The profit test is the primary test. If you can show that the activity earned income in three out of the last five years, it is for profit. If the activity does not meet the profit test, the IRS will take an individualized look at the facts of your activity using the list of questions above to make the determination business or hobby. It should be noted that this list is not all inclusive.

Business Activity: If the activity is determined to be a business, you can deduct ordinary and necessary expenses for the operation of the business on a Schedule C or C-EZ on your Form 1040 without considerations for percentage limitations. An ordinary expense is an expense that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.

Hobby: If an activity is a hobby, not for profit, losses from that activity may not be used to offset other income. You can only deduct expenses up to the amount of income earned from the hobby. These expenses, with other miscellaneous expenses, are itemized on Schedule A and must also meet the 2 percent limitation of your adjusted gross income in order to be deducted.

What are allowable hobby deductions under IRC 183?

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:

• Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.

• Deductions that don't result in an adjustment to the basis of property, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.

• Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

If your hobby is regularly generating income, it could makes tax sense for you to consider whether it is a business or not. You may be able to save on taxes.

SK Financial Services, P.A.,


Visit our website www.skfinancial.com for FREE tax saving information.

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SK Financial CPA Blog Education 529 Plan - What's New

Education 529 Plan - What's New

Education 529 Plan - What's New

What is a 529 plan? They are investment vehicles designed to help families pay for future expenses associated with college or other qualified post-secondary training. Though contributions to a 529 plan are not deductible, these plans offer other tax advantages and are named after Section 529 of the Internal Revenue Code. All 50 states and the District of Columbia sponsor at least one type of 529 plan.

What's new in 2009? The American Recovery and Reinvestment Act of 2009 (ARRA) added computer technology to the list of college expenses (tuition, books, etc.) that can be paid for by a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services to be used by the designated beneficiary of the 529 plan while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature.

What "computer technology or equipment" refers to. This means any computer and related peripheral equipment. Related peripheral equipment is defined as any auxiliary machine (whether on-line or off-line) which is designed to be placed under the control of the central processing unit of a computer, such as a printer. This does not include equipment of a kind used primarily for amusement or entertainment. "Computer technology" also includes computer software used for educational purposes.

Note: Origins: Congress created them in 1996 and they are named after section 529 of the Internal Revenue code. The legal name for 529 plans is "qualified tuition programs" in the tax code.

Why use a 529 plan? There are advantages of 529 plans and one may be suitable for your family's needs. Earnings are not subject to federal tax when used for eligible college expenses. Earnings are often not subject to state tax. States may offer other incentives to in-state participants. There are no income restrictions on individual contributors. Contributions are only limited by the qualified education expenses of the beneficiary. You can change the beneficiary of a plan if the new beneficiary is in the same family. You can open a plan benefiting anyone: a relative, a friend or even yourself. The plan owner or custodian controls the funds until withdrawal, not the beneficiary.

How 529 plans are structured. There are two basic types of 529 plans - prepaid tuition plans and savings plans. A prepaid tuition plan enables a family to pay for future tuition now in current dollars and prices. A savings plan enables a family to accumulate funds in a tax-advantaged way for future tuition costs. A 529 plan can be established and maintained by a state, state agency, or an eligible educational institution. Each 529 plan is somewhat unique. Some state-sponsored plans offer incentives to in-state participants, such as state income-tax deductions or credits. Each 529 plan has one custodian and one beneficiary. A student or future student can be the beneficiary of more than one 529 plan.

Contribution limitations. Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. Contributors should be aware of potential gift tax issues if the amount contributed by any one contributor during a year to a given beneficiary, together with other gifts to that beneficiary, is greater than $13,000. For a general discussion of gift tax rules, see IRS Publication 950, Introduction to Estate and Gift Taxes. For information on a special rule that applies to contributions to 529 plans, see the instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

Use with other aid. A family using a 529 plan to pay for some of a child's college expenses may still be eligible to claim either the American opportunity credit or the lifetime learning credit. Check IRS Publication 970, Tax Benefits for Education.

Living Trust 101

Living Trust 101

A trust, like a corporation, is an entity that exists only on paper but is legally capable of owning property. A flesh and blood person, however, must actually be in charge of the property; that person is called the trustee. You can be the trustee of your own living trust, keeping full control over all property legally owned by the trust.

There are many kinds of trusts. A "living trust" (also called an "inter vivos" trust) is simply a trust you create while you're alive, rather than one that is created at your death under the terms of your will.

All living trusts are designed to avoid probate. Some also help you save on death taxes, and others let you set up long-term property management.

Do I need a living trust?

Property you transfer into a living trust before your death doesn't go through probate. The successor trustee, the person you appointed to handle the trust after your death, simply transfers ownership to the beneficiaries you named in the trust.

In many cases, the whole process takes only a few weeks and there are no lawyer or court fees to pay. When the property has all been transferred to the beneficiaries, the living trust ceases to exist.

Is it expensive to create a living trust?

The expense of a living trust comes up front. Many lawyers would charge relatively little for drafting your will, in hopes of getting your estate later as a client. They may charge more for a living trust.

Some people have chosen to use a self-help book or software program, to create a Declaration of Trust (the document that creates a trust) yourself. They may consult a lawyer if they have questions that the self-help publication doesn't answer. But there's always the danger of problems they don't see, that a lawyer could help avoid if consulted.

Is a trust document ever made public, like a will?

A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate, inventories of the deceased person's assets and debts, for example. The terms of a living trust, however, need not be made public.

Does a trust protect property from creditors?

Holding assets in a revocable trust does not shelter them from creditors. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name.

After your death, however, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate). That complicates matters for creditors; by the time they find out about your death, your property may already be dispersed, and the creditors have no way of knowing exactly what you owned (except for real estate, which is always a matter of public record). It may not be worth the creditor's time and effort to try to track down the property and demand that the new owners use it to pay your debts.

On the other hand, probate can offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they're out of luck forever.

Do I need a trust if I'm young and healthy?

Probably not. At this stage in your life, your main estate planning goals are probably making sure that in the unlikely event of your early death, your property is distributed how you want it to be and, if you have young children, that they are cared for. You don't need a trust to accomplish those ends; writing a will, and perhaps buying some life insurance, would be simpler.

Can a living trust save taxes?

A simple probate-avoidance living trust has no effect on either income or estate taxes. More complicated living trusts, however, can greatly reduce your federal estate tax bill if you expect your estate to owe estate tax at your death.

How to Get a Copy of Your Tax Return

How to Get a Copy of Your Tax Return

There are two easy and convenient options for obtaining copies of your federal tax return information - tax return transcripts and tax account transcripts - by phone or by mail.

A tax return transcript shows most line items from the tax return (Form 1040, 1040A or 1040EZ) as it was originally filed, including any accompanying forms and schedules. It does not reflect any changes you, your representative or the IRS made after the return was filed. In many cases, a return transcript will meet the requirements of lending institutions such as those offering mortgages and student loans.

A tax account transcript shows any later adjustments either you or the IRS made after the tax return was filed. This transcript shows basic data, including marital status, type of return filed, adjusted gross income and taxable income. The IRS does not charge a fee for transcripts, which are available for the current and three prior calendar years. Allow ten to thirty days for delivery.

To request either transcript:

• Phone: Call 1-800-829-1040 and follow the prompts in the recorded message
• Mail: Complete IRS Form 4506-T, Request for Transcript of Tax Return.

If you need a photocopy of a previously processed tax return and attachments, complete Form 4506, Request for Copy of Tax Form, and mail it to the IRS address listed on the form for your area. There is a fee of $57.00 for each tax period requested. Copies are generally available for the current and past six years.

If you are a taxpayer impacted by a federally declared disaster, The IRS will waive the usual fees and expedite requests for copies of tax returns.

For more detail visit us here:

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Track Your Tax Refund

Track Your Tax Refund

When will you receive your refund? The answer depends on how you filed your return. The IRS should issue your refund check within six to eight weeks of filing a paper return. If you chose to receive your refund through direct deposit, you should receive it within a week. If you use e-file, your refund should be issued between two and three weeks.

You can check on the status of your refund by clicking on the links below.

http://www.skfinancial.com/taxrefunds.html

First-Time Homebuyer Credit - Deadline December 1

With the deadline quickly approaching, potential homebuyers are reminded that they must complete their first-time home purchases before December 1 to qualify for the special first-time homebuyer credit. The American Recovery and Reinvestment Act extended the tax credit, which has provided a tax benefit to more than 1.4 million taxpayers so far.
The credit of up to $8,000 is generally available to homebuyers with qualifying income levels who have never owned a home or have not owned one in the past three years.
Because the credit is only in effect for a limited time, those considering buying a home must act soon to qualify for the credit. Under the Recovery Act, an eligible home purchase must be completed before December 1, 2009. This means that the last day to close on a home is November 30.

The credit cannot be claimed until after the purchase is completed. For purchases made this year before December 1, taxpayers have the option of claiming the credit on their 2008 returns or waiting until next year and claiming it on their 2009 returns.
For those considering a home purchase this fall, here are some other details about the first-time homebuyer credit:
The credit is 10 percent of the purchase price of the home, with a maximum available credit of $8,000 for either a single taxpayer or a married couple filing jointly. The limit is $4,000 for a married person filing a separate return. In most cases, the full credit will be available for homes costing $80,000 or more.

The credit reduces the taxpayer's tax bill or increases his or her refund, dollar for dollar. Unlike most tax credits, the first-time homebuyer credit is fully refundable. This means that the credit will be paid to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.
Only the purchase of a main home located in the United States qualifies. Vacation homes and rental properties are not eligible.
A home constructed by the taxpayer only qualifies for the credit if the taxpayer occupies it before December 1, 2009.

The credit is reduced or eliminated for higher-income taxpayers. The credit is phased out based on the taxpayer's modified adjusted gross income (MAGI). MAGI is adjusted gross income plus various amounts excluded from income-for example, certain foreign income. For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the range is $75,000 to $95,000. This means the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.

The credit must be repaid if, within three years of purchase, the home ceases to be the taxpayer's main home. For example, a taxpayer who claims the credit based on a qualifying purchase on September 1, 2009, must repay the full credit if he or she sells the home or converts it to business or rental use at any time before September 1, 2012.
Taxpayers cannot take the credit even if they buy a main home before December 1 if:
The taxpayer's income is too large. This means joint filers with MAGI of $170,000 and above and other taxpayers with MAGI of $95,000 and above.

The taxpayer buys a home from a close relative. This includes a home purchased from the taxpayer's spouse, parent, grandparent, child or grandchild.
The taxpayer owned another main home at any time during the three years prior to the date of purchase. For a married couple filing a joint return, this requirement applies to both spouses. For example, if the taxpayer bought a home on September 1, 2009, the taxpayer cannot take the credit for that home if he or she owned, or had an ownership interest in, another main home at any time from September 2, 2006, through September 1, 2009.
The taxpayer is a nonresident alien.

With the deadline quickly approaching, potential homebuyers are reminded that they must complete their first-time home purchases before December 1 to qualify for the special first-time homebuyer credit. The American Recovery and Reinvestment Act extended the tax credit, which has provided a tax benefit to more than 1.4 million taxpayers so far.
The credit of up to $8,000 is generally available to homebuyers with qualifying income levels who have never owned a home or have not owned one in the past three years.
Because the credit is only in effect for a limited time, those considering buying a home must act soon to qualify for the credit. Under the Recovery Act, an eligible home purchase must be completed before December 1, 2009. This means that the last day to close on a home is November 30.

The credit cannot be claimed until after the purchase is completed. For purchases made this year before December 1, taxpayers have the option of claiming the credit on their 2008 returns or waiting until next year and claiming it on their 2009 returns.
For those considering a home purchase this fall, here are some other details about the first-time homebuyer credit:
The credit is 10 percent of the purchase price of the home, with a maximum available credit of $8,000 for either a single taxpayer or a married couple filing jointly. The limit is $4,000 for a married person filing a separate return. In most cases, the full credit will be available for homes costing $80,000 or more.

The credit reduces the taxpayer's tax bill or increases his or her refund, dollar for dollar. Unlike most tax credits, the first-time homebuyer credit is fully refundable. This means that the credit will be paid to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.
Only the purchase of a main home located in the United States qualifies. Vacation homes and rental properties are not eligible.

A home constructed by the taxpayer only qualifies for the credit if the taxpayer occupies it before December 1, 2009.

The credit is reduced or eliminated for higher-income taxpayers. The credit is phased out based on the taxpayer's modified adjusted gross income (MAGI). MAGI is adjusted gross income plus various amounts excluded from income-for example, certain foreign income. For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the range is $75,000 to $95,000. This means the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.

The credit must be repaid if, within three years of purchase, the home ceases to be the taxpayer's main home. For example, a taxpayer who claims the credit based on a qualifying purchase on September 1, 2009, must repay the full credit if he or she sells the home or converts it to business or rental use at any time before September 1, 2012.
Taxpayers cannot take the credit even if they buy a main home before December 1 if:
The taxpayer's income is too large. This means joint filers with MAGI of $170,000 and above and other taxpayers with MAGI of $95,000 and above.

The taxpayer buys a home from a close relative. This includes a home purchased from the taxpayer's spouse, parent, grandparent, child or grandchild.

The taxpayer owned another main home at any time during the three years prior to the date of purchase. For a married couple filing a joint return, this requirement applies to both spouses. For example, if the taxpayer bought a home on September 1, 2009, the taxpayer cannot take the credit for that home if he or she owned, or had an ownership interest in, another main home at any time from September 2, 2006, through September 1, 2009.
The taxpayer is a nonresident alien.