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When a Tax Credit isn’t Really a Tax Credit |
By Charles Delvalle
Bait and switch
In the retail
world, bait and switch is a form of fraud that lures customers in by
advertising something at a ridiculously low price, and then once you go in
to get the item, it’s revealed the item isn’t available, but a reasonably
priced alternative is.
This reminds
me a lot of what Uncle Sam is doing right now.
In the
recently passed housing legislation, there is an offer of a tax credit for
first time homebuyers. For those that don’t know, a tax credit directly
reduces the amount of income tax paid by offsetting other income tax
liabilities.
So if your tax
liability is $10,000 and you receive a $5,000 tax credit, then your tax
liability would only be $5,000. Since many people don’t actually owe Uncle
Sam and receive refunds anyway, the credit basically gives them an even
bigger refund when April comes around.
The tax credit
in the housing legislation is for first-time homebuyers that buy a home
between April 9, 2008 and July 1, 2009. It basically gives them a tax
credit of 10 percent of the purchase price of a home, up to $7,500.
When I first
heard about the credit, I was pretty excited. I thought to myself ‘Wow, I
could pay off my credit cards with this or even take a portion and put it
to work in the market’.
No such luck.
You see, just
because the good uncle labeled this as a tax credit doesn’t mean it
actually is.
The
bait and switch in action
If you look a
little deeper, you’ll find something very disheartening.
This isn’t a
tax credit at all. It’s a sham, really.
The reality is
that this is nothing more than a government loan. That’s right; it’s a
loan not a tax credit.
Granted, the
loan has great terms. It’s zero-interest and the repayment period is 15
years (or when you sell your home). But, it isn’t very easy to find this
out. When you go to the tax credit website (made by none other than the
NAHB), you have to go 15 questions down to actually find out.
15 questions.
That’s a lot to go through.
That seems
pretty sleazy. Why call this thing a tax credit if it’s not? Why not just
call it a zero-interest government loan? After all, that’s what it is.
I’m buying a
home this year, so I’m still excited. A zero-interest loan is a
zero-interest loan. I’m not going to pass that up. And if you’re buying a
home for the first time, neither should you.
What
to do with this ‘credit’ to make it worth your while
The reasons
why I like this loan are the terms. They allow you to pay back whatever
you borrowed with no interest attached.
When you
factor in inflation, you’re actually paying less than the credit is worth
by the end of the 15-year term. Here’s how it works.
Let’s say you
owe no taxes, borrow $5,000, and inflation averages three percent for the
next 15 years.
Every year, it
takes three percent more to have the same purchasing power as the original
$5,000. So in 15 years, it would take $7,789 to equal today’s $5,000.
That equates
to price increases of 55 percent over 15 years, which means that the
$5,000 you owe would only have the purchasing power of roughly $2,750 at
the end of the 15 years.
So by taking
on this loan, inflation actually works for you since you pay no interest.
That’s just one big benefit of the loan.
Another thing
you could do is pay off your high-interest credit cards with the loan. If
you have $5,000 in credit card debt and pay it off with the loan, you save
about 20 percent per year just on interest alone. That’s savings of about
$1,000 every single year – for a total savings of about $15,000.
Great benefit
right? Well there’s one more.
Let’s say you
have no credit card debt and don’t really need the money, take it
anyway.
Since you pay
no interest on this loan, you could just put the money into a safe, BBB or
higher rated bond yielding 8-9 percent. That’s $400-$450 in interest
payments to you. It’s practically free money. After all, you don’t pay
interest on the loan.
The one caveat
to this approach is that after two years, you have to start paying off the
tax credit. If you borrowed $5,000, then over 13 years you would have to
pay back about $384 each year.
But you could
also just use your yearly bond income to pay it off (and even have money
left over, depending on your yield).
That way you
don’t have to sell your bonds. If you start paying the $5,000 loan off
immediately, over 15 years you would only need to pay $333 every year.
Of course, you
can do other things with the money too. If you are ballsy, you could put
it into the stock or commodities market. But, there’s a chance you could
lose money. That’s one big reason why I wouldn’t recommend it.
The end result
is that if you are a first-time homebuyer, you should definitely take
advantage of this ‘tax credit’ (which isn’t a credit at all).
For more
information about how to take advantage of it or if you have other
questions, check out this site:
http://www.federalhousingtaxcredit.com/
Stay free,
Charles
P.S. To let
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feedback@investorsdailyedge.com. | 
