Learn About Tax Credits for Housing Assistance

Overview of Tax Credits for Housing

Tax credits are reductions in the amount of income tax a person or family owes to the federal government. Unlike tax deductions, which lower the amount of income subject to tax, tax credits directly reduce the final tax bill dollar-for-dollar. For every dollar of tax credit, a taxpayer owes one dollar less in taxes. This makes tax credits particularly valuable for people with lower to moderate incomes.

Several tax credits exist that specifically relate to housing costs and homeownership. These programs were created by Congress to encourage specific behaviors—such as buying energy-efficient appliances, installing renewable energy systems, or maintaining a primary residence. The Internal Revenue Service (IRS) administers these credits and determines the rules for how they work.

Housing-related tax credits differ from housing vouchers or rental subsidies. A tax credit reduces taxes owed; it does not provide monthly rent payments or direct cash for housing expenses. The credit appears on a person's annual tax return and may result in a larger tax refund or smaller tax bill when filing for that year.

Understanding these credits requires learning about:

• Which tax credits relate to housing and homeownership
• How much each credit can reduce taxes
• Who may be able to use each credit
• What conditions must be met to claim each credit
• How the credits work when filing taxes

Practical Takeaway: Tax credits for housing are tools available through the tax system that reduce the amount of taxes owed. Learning about these credits helps homeowners and renters understand potential tax reductions when preparing their annual tax returns.

The Earned Income Tax Credit and Housing Costs

The Earned Income Tax Credit (EITC) is the largest anti-poverty tax credit in the United States. According to the IRS, over 26 million people claimed the EITC in 2022, representing approximately $61 billion in tax credits. While the EITC does not directly pay for housing, it provides refundable tax credits that can be used for any purpose, including housing expenses.

The EITC is designed for working individuals and families with low to moderate incomes. The credit amount increases as earned income increases, up to a maximum amount, then decreases as income rises above certain thresholds. For 2023, the maximum EITC for a family with three or more children was $3,995, while a single worker without children could receive up to $560.

How the EITC relates to housing: When a person receives an EITC refund, that money can be used for housing payments, repairs, utilities, or any other expense. Many housing organizations report that EITC refunds help families cover rent or mortgage payments, especially when received as a lump sum during tax return season.

Key characteristics of the EITC:

• It is a refundable credit, meaning if the credit exceeds taxes owed, the excess is returned as a refund
• It is available only to people with earned income from employment or self-employment
• The credit amount depends on income level, filing status, and number of children
• It is recalculated each tax year based on that year's income
• A worker can claim the credit when filing a tax return, or in some cases, through an employer

Practical Takeaway: The EITC can put significant money in the hands of working families with lower incomes, and that money can be directed toward housing needs. Understanding the EITC amount a person might receive helps with planning for housing expenses.

Energy-Efficient Home Improvement Tax Credits

The federal government offers tax credits to encourage homeowners to make their homes more energy-efficient. These credits apply to improvements that reduce energy consumption, such as upgrading insulation, replacing windows, installing heat pumps, or adding solar panels. The Inflation Reduction Act, passed in 2022, significantly expanded and extended these credits.

The Residential Energy Credit covers improvements made to a primary residence. According to the IRS, homeowners can claim a credit of up to $3,200 per year for certain qualifying improvements. The credit is a percentage of the cost of the improvement—typically 30% for items like solar panels, heat pumps, and battery storage systems installed between 2022 and 2032.

Examples of improvements that may qualify for energy credits include:

• Solar panels and solar water heaters
• Wind turbines
• Geothermal heat pumps
• Air-source heat pumps
• Central air conditioners
• Water heaters powered by solar or biomass
• Insulation and air sealing materials
• Doors and windows meeting energy standards
• Home energy audits performed by certified professionals

Important details about energy-efficient home improvement credits:

• The improvement must be made to the taxpayer's main home
• The homeowner, not a contractor or installer, typically claims the credit
• The property must be located in the United States
• The improvement must meet or exceed specific energy performance standards set by the IRS and Department of Energy
• Documentation of the improvement and its cost must be retained

Practical Takeaway: Homeowners considering energy-efficient improvements should research which improvements may qualify for federal tax credits. Gathering documentation of the improvement cost before claiming the credit on a tax return is essential.

First-Time Homebuyer Tax Credits and Considerations

The federal government has offered first-time homebuyer tax credits at various points in recent history. The most recent significant credit was the First-Time Homebuyer Credit offered during 2008-2010 following the housing market crisis. That credit provided up to $8,000 to first-time homebuyers purchasing a primary residence. However, that credit is no longer available.

Currently, there is no active federal first-time homebuyer tax credit. Instead, first-time homebuyers may benefit from other tax advantages related to homeownership, such as the mortgage interest deduction and property tax deduction, which reduce taxable income for homeowners who itemize deductions on their tax returns.

Some states and local governments do offer their own first-time homebuyer credits or down payment assistance programs. These vary widely by location. A few examples of state-level programs include:

• Illinois' first-time homebuyer credit, which offers a percentage of mortgage interest paid
• Various state housing finance agencies that provide down payment assistance tied to tax benefits
• Local homebuyer programs in specific cities and counties

Information about first-time homebuyer resources:

• The U.S. Department of Housing and Urban Development (HUD) publishes lists of homeownership programs by state
• State housing finance agencies maintain websites with current program information
• Local housing counseling agencies can provide information about programs in specific areas
• The IRS website contains current information about available federal tax credits

Practical Takeaway: While a federal first-time homebuyer tax credit does not currently exist, exploring state and local programs may reveal other financial resources. Consulting the IRS and state housing agency websites helps identify what programs may be available in a specific location.

Dependent Care Credit and Housing Stability

While not strictly a housing credit, the Child and Dependent Care Credit can indirectly help stabilize housing by reducing overall tax liability for working parents. This credit reimburses a portion of child care or dependent care expenses for working individuals and couples, freeing up household income that may be directed toward housing costs.

The credit covers expenses paid for someone to care for a child under age 13 or a dependent of any age who is unable to care for themselves. It