Preliminary numbers from the Internal Revenue Service suggest 1.4 million taxpayers will claim the federal first-time homebuyer tax credit on their 2008 tax returns, meaning the program is likely to meet or exceed the 2 million target set by lawmakers before it sunsets Nov. 30, 2009.

A report by the Treasury Inspector General for Tax Administration, which looks at 56.9 million tax returns received through March 6, revealed that 567,685 households claimed the tax credit, but 38,158 weren’t eligible because they may have been homeowners in the last three years.

If those trends hold up for all 140 million tax returns the IRS expects this year, about 1.4 million households will claim the first-time homebuyer tax credit, but about 94,000 of those will be disqualified because they are not first-time homebuyers.

A first-time homebuyer is defined as anyone who hasn’t had an ownership interest in a principal residence for three years, and income limits also apply.

IRS Form 5405 will allow qualifying buyers to claim the credit on either their 2008 or 2009 tax returns, so many people purchasing homes this year won’t be claiming the credit until next year. The credit is equal to 10 percent of the purchase price of the home, and is capped at $8,000 for homes purchased this year.

Processing the tax returns of those who claim the credit has been complicated by lawmakers’ decision to bolster the program in 2009, the Treasury Inspector General said in its report.

For first-time homebuyers who purchased between April 8, 2008, and Dec. 31, 2008, the credit maxes out at $7,500, and is like an interest-free loan that must be repaid over a 15-year period.

The American Recovery and Reinvestment Act of 2009 raised the cap to $8,000 for homes purchased before Dec. 1 of this year, and eliminated the repayment requirement unless a home is resold within three years. …CONTINUED

In its March 30 report, the Treasury Inspector General said the IRS’ current process was to reject Form 5405 claims that exceed $7,500. To make sure it is not improperly rejecting claims for homes purchased in 2009, the IRS has had to reprogram software to identify the date of purchase on Form 5405s that are filed electronically, and manually review paper returns to identify Form 5405s that require separate processing, the report said.

While the first-time homebuyer tax credit may be proving to be a headache for the IRS, it’s proved to be a big hit with taxpayers.

Congress allocated $13.6 billion for the program in the hopes of encouraging 2 million home purchases to stem the decline of housing markets. But there’s no provision to end the program early if it exceeds those limits.

A similar tax credit in California that’s aimed at helping sell at least 10,000 newly constructed homes is capped at $100 million, and is already about one-third subscribed just 45 days after its introduction.

California is offering a tax credit of up to $10,000 to eligible buyers purchasing a new home during the year ending March 1, 2010, or until $100 million in tax credits are approved. Applications are being processed on a first-come, first-served basis.

Through April 15, state officials reported they had received (but not processed) 3,589 applications for the credit totaling $34.9 million, or a little more than one-third of the program’s capacity.

***

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