Form 8859 is a tax form that will never be used by the majority of taxpayers. However, if you live in the District of Columbia (D.C.), it could be the key to saving thousands of dollars on your taxes. While many first-time home purchasers in D.C. are entitled to a federal tax credit, Form 8859 calculates the amount of carry-forward credit you can use in future years, not the amount of your initial tax credit.
The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.
D.C. First-time homebuyer tax credit
If you're a first-time homebuyer in D.C., you may be entitled to a tax credit of up to $5,000. There are, however, many restrictions on the credit:
- For starters, you must have bought a home in D.C. during the current tax year
- Less obvious is the stipulation that you, along with your spouse if you file jointly, must not have owned a main residence in D.C. during the previous one-year period
- Additionally, the $5,000 credit is phased out based on your adjusted gross income:
- As a single filer, the phase-out ranges from $70,000 to $90,000, with no credit allowed for incomes above $90,000
- For joint filers, the income limitation is $130,000, with the phase-out ranging from $110,000 to $130,000 in adjusted gross income
IRS Form 8859
On Form 8859, you're allowed to claim a credit carry forward if you were unable to use it during the prior year. For example, if in 2017 you carried forward the credit from a prior year but could not use it due to an adjusted gross income limitation, you may be able to claim the unused credit in 2018.
Form 8859 consists of just four short lines:
- On the first line, you enter any carry-forward credit you were entitled to in the previous tax year
- On line 2, you enter your limitation based on tax liability, which you can calculate using a worksheet on the form
- Line 3 gives you your allowable current-year credit
- If the amount of your carry-forward credit still exceeds your allowable credit in the current year, line 4 shows the amount that you can carry forward to the following year
How tax credits work
Tax credits, including the first-time homebuyer credit, are different from tax deductions. While a tax deduction can help you reduce the amount of your taxable income, a tax credit directly reduces the taxes you owe, on a dollar-for-dollar basis.
For example, if you owe the IRS $10,000 in taxes but qualify for a $3,000 D.C. homebuyer credit, your tax liability drops to $7,000 ($10,000 - $3,000 = $7,000). Use Form 8859 to indicate a prior-year credit and include the current year credit amount on line 54 of your Form 1040; the credit is applied after you calculate the tax on your income.
Form 8859 and Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) is a separate tax system designed to prevent certain taxpayers from avoiding income tax liability. Credits from certain so-called preference items, including Form 8859 credits, are not allowed when computing your AMT income.
Taxpayers who have a significant amount of deductions and exemptions to reduce their ordinary income tax liability can face a higher tax liability under the AMT system than under the regular system. If you don't already have a lot of preference exemptions, filing Form 8859 likely will not trigger any AMT tax for you.
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