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Stock Ideas Investors Daily Edge When a Tax Credit isn’t Really a Tax Credit
Stock Ideas Investors Daily Edge When a Tax Credit isn’t Really a Tax Credit 
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| When a Tax Credit isn’t Really a Tax Credit |
| Saturday, 23 August 2008 | ||||||||
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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 me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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