If housing weakness triggeredthis recession, maybe housing strength can speed the recovery. Following this logic, Congress created a tax credit for certain home buyers in 2008 and sweetened the pot twice in 2009. Consequently, more home buyers will get more help from Uncle Sam in the first half of 2010. "The additional features create an incredible synergistic effect for the new homeowner," says Ida Yarbrough, a CPA in Los Angeles.

The new higher income thresholds will open the door for more affluent clients to qualify for the tax credit. And longer deadlines will give some breathing room to clients trying to finance a mortgage in today's tight credit environment.

Should financial planners encourage clients to buy now? Or is it better to tell clients to postpone their home-buying plans in hopes that Congress will once again extend and expand the tax credit? No one knows what Congress might do, especially in an election year, but planners who know what's on the table now, as well as the backstory, will be able to provide informed advice.

ROUND ONE

This round of tax credits began with the Housing and Economic Recovery Act of 2008, passed in July of that year (before the financial crisis of late 2008 reached its peak). Playing loosely with language, "first-time" home buyers were offered a "tax credit" of 10% of the purchase price of a home, with a cap of $7,500.

A first-time home buyer was defined as someone who had not owned a house and used it as a principal residence in the previous three years. Perhaps more important, this tax credit had to be repaid, $500 per year, over the following 15 years. (Selling the house would accelerate the repayment.)

"That tax credit was more like a loan than a true credit even though repayment was interest-free," Yarbrough says. The deal was to be in effect through the first half of 2009, only for purchases of a principal residence. There were income limits too: Eligibility for the credit phased out with income from $75,000 to $95,000 ($150,000 to $170,000 on a joint return.)

ROUND TWO

In the American Recovery and Reinvestment Act of 2009, passed in February, the interest-free loan from Uncle Sam became a true tax credit. No repayment of tax savings would be necessary as long as the owner lived in the house for at least 36 months after the purchase. In addition, the cap on the tax credit was raised from $7,500 to $8,000.

Otherwise, this provision was similar to its predecessor: The tax break was limited to first-time home buyers, as defined, and also subject to the same income limits. Homes purchased in 2009, through Nov. 30, were eligible for this tax credit.

ROUND THREE

The Worker, Homeownership and Business Assistance (WHBA) Act of 2009, passed in November, extended the no-payback tax credit through the first half of 2010, as long as a binding contract was signed before May 1. Moreover, two provisions of the new law have greatly expanded access to this tax credit.

First, the income limits were raised. Now the full tax credit is available to single taxpayers with income up to $125,000, not $75,000, and up to $225,000 on a joint return rather than $150,000. (Partial credits are available with income up to $145,000 and $245,000, respectively.)

Second, tax credits are now available to purchasers other than those who haven't owned a home for three years. People who have owned and lived in the same home for five consecutive years during the eight years before buying a new residence may qualify for a $6,500 tax credit as well. The time limits and income limits are the same as for the current version of the $8,000 credit.

Still, though Congress expanded access to tax credits for homebuyers, some restrictions were added to both the $8,000 and the $6,500 credit. "A house can't be purchased from a relative," says Marty Abo, a CPA in Voorhees, N.J. "Also, someone who can be claimed as a dependent by someone else is ineligible for the credit." A buyer (or the buyer's spouse) must be at least 18 years old on the purchase date to claim either credit. What's more, if the purchase price of a home exceeds $800,000, no credit will be available.

As with its predecessors, this credit has a carryback option. Just as a qualifying home purchase in 2009 could be claimed on a 2009 or a 2008 tax return, a qualifying purchase in 2010 can be taken on a 2010 or a 2009 return. Clients whose income has fluctuated may want to choose the year with lower income, to get a larger tax credit.

WORKING THE CREDIT