You see, unlike any other tax "credit" that I can think of, this one has to be repaid. The credit truly acts like a zero interest loan that is repaid over the next 15 years, or when the house is sold if there is sufficient gains. So if a family claimed (ie borrowed) $7,500 they would repay that by owing an additional $500 on their taxes each year for the next 15 years.
An interest free loan is a good thing though, right? It can be, if used constructively. My beef lies in calling it a tax "credit". You don't have to repay your earned income tax credit, or child and dependent care tax credit. In fact, I can't seem to find a single "credit" that you have to repay.....except this one, which makes the name all the more galling. It seems that it sets the stage for an expectation, free money because it is a tax credit, when in fact it is nothing of the sort.
Won't borrowers take the time to learn the rules and read the fine print so they won't be surprised when they owe $500 more on their 2010 taxes? If we have learned anything from the market meltdown we shouldn't even have to ask this question. So lets look at the possibilities of how this "credit" could impact families now.
Lets start with the good. We will assume a family actually owes $7,500 in taxes and will therefore be able to claim the whole credit. In our current economy this could be a fantastic boon for a household in distress. If they are struggling to make ends meet they could use this to make up the difference rather than turning to a high interest credit card or insane interest payday loan. They could use it to pay down existing debts and bills, leveraging the no interest loan in a smart way to wipe out high interest payments and freeing up cash reserves. It could even act as emergency savings for the family, they could sock it away for a rainy day to help cover medical expenses or vehicular distress. This is a great tool for families.
If they spend it that way. Remember, part of the reason the government is providing the money in the first place is to stimulate the economy. They want them to spend it. If they spend it to make ends meet, the family is helped, and the government gets what they want. If it is used to pay down debt, it has little impact on the economy (unless it frees up money for the family to spend in the future by reducing payments). It could however be used for our favorite past time, increased consumption. Increased consumption implies we are spending more than what is required to meet our needs, and all too often in a world of instant gratification this is the way of most financial windfalls. Many households have developed the habit of spending the tax return frivolously, why should we expect them to approach this larger windfall any differently? If the money is spent on increased consumption then the family has not "gained" anything, they are simply spending today what they could have spent tomorrow...for the next 15 years.
Regardless what the initial $7,500 is spent on, lets look at the other end. For the next 15 years the family will owe $500 more on their taxes. Will families even remember to take this into account in 2010? What impact will this have on our spending for the next 15 years in and around tax time?
What about the other option? What if I sell my home and the government wants their money back? Profit from the sale is subject to recapture up to the amount claimed. My concern here is the fact that many homeowners put little to nothing down in the first place, and as such when they go to sell one or two years later, especially with the current home appreciation rates ;) there may not be much, if any, profit from the sale. When you pay off the $7,500 on top of that (or whatever is left over based on how long you have been shelling out $500 a year for)....I suspect many homeowners will have little to nothing to show for their time in the home unless they stay for five years or more. This means no down payment for the next home, meaning if they want to keep being a home owner they will have to look at another low to no down payment loan....haven't we been down this road once before? Or they could go back to the renting. Either way the family has made no progress.
It all comes back to how it is sold. The US government gets grumpy with businesses for false or deceptive advertising. How is this any different? It could have been called many things, a tax refund advance (implying a loss of future refunds) or most appropriately, a no interest first time home buyer loan. What it never should have been called, is a credit. They are not freebie bailout bucks. Do you think the Better Business Bureau accepts complaints against the US government? No matter what we say on the side of the package, its the contents that matter most.
The most confusing part of all? The proposed new housing tax credit doesn't look like it will have to be repaid at all. But we will call both of them credits, just to make things clear ;) .
Lucas, I am really glad that you posted this. I don't have a lot to say about opinion wise, but my husband and I have been considering buying a home in the near future. In the past few weeks we have actually be thinking about "hurrying" to buy a home before July to take advantage of this tax credit. Now that I know what it really is, I don't think we will be in a rush. We'll just take our time.
ReplyDeleteI'm interested in knowing whether or not the credit amendment that you linked to your post survived in the changes made to the stimulus bill that recently passed both houses.
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