On February 9, 2022, Governor Gretchen Whitmer signed Public Acts 5 and 6 of 2022 into law to create the Michigan First-Time Home Buyer Savings Program. This program allows an individual to open a first-time home buyer savings account with a qualified financial institution in Michigan where tax-favored contributions and withdrawals will assist the potential home buyer in saving money to purchase a primary residence. This blog article will explain the rules and regulations regarding this program and the tax benefits available.
SETTING UP THE FIRST-TIME HOME BUYER SAVINGS ACCOUNT
“Beginning January 1, 2022 through December 31, 2026, any individual may open an account with a financial institution and designate the account, in its entirety, as a first-time home buyer savings account to be used to pay or reimburse a qualified beneficiary’s eligible costs for the purchase of a single-family residence in this state.” MCL 565.1005(2).
- “Account holder” means an individual who establishes, individually or jointly with 1 or more other individuals, an account with a financial institution for which the account holder claims a first-time home buyer savings account status on his or her income tax return.” MCL 565.1003(a).
- “Qualified beneficiary” means a first-time home buyer who is designated as the beneficiary of an account designated by the account holder as a first-time home buyer savings account. MCL 565.1003(j).
- “First-time home buyer” means an individual who is a resident of this state and has not owned or purchased, either individually or jointly, a single-family residence during a period of 3 years prior to the date of the purchase of a single-family residence. MCL 565.1003(f).
“An account holder shall designate a first-time home buyer as the qualified beneficiary of the first-time home buyer savings account.” MCL 565.1005(2). “The account holder may designate himself or herself as the qualified beneficiary and may change the designated qualified beneficiary at any time, but there may not be more than 1 qualified beneficiary at any 1 time.” Id.
Spouses may jointly own a first-time home buyer savings account if they file a Michigan joint income tax return. MCL 565.1005(3). “An individual may be the account holder of more than 1 first-time home buyer savings account.” Id. “However, an account holder cannot have multiple accounts that designate the same qualified beneficiary.” Id. “An individual may be designated as the qualified beneficiary on more than 1 first-time home buyer savings account.” Id.
CONTRIBUTIONS
Contributions to and interest earned on a first-time home buyer savings account are exempt from Michigan income taxation. MCL 565.1011(2).
“The account holder is responsible for the use or application of funds in a first-time home buyer savings account.” MCL 565.1007(1). “The account holder shall not use funds held in an account to pay expenses of administering the account, except that a service fee may be deducted from the account by a financial institution in which the account is held.” Id. “An account holder may withdraw funds, in whole or in part, from a first-time home buyer savings account and deposit the funds in a new first-time home buyer savings account held by a different financial institution or the same financial institution.” Id.
“The maximum account balance limit for a first-time home buyer savings account shall not exceed a maximum of $50,000.00.” MCL 565.1011(1). “Accounts may continue to accrue earnings if the total balance has reached the maximum account balance limit and shall not be considered to have exceeded the maximum account balance limit [of $50,000.00].” Id.
“Only cash and marketable securities may be contributed to a first-time home buyer savings account.” MCL 565.1005(4). “[P]ersons other than the account holder may make contributions to a first-time home buyer savings account.” Id.
WITHDRAWALS
Qualified withdrawals made from first-time home buyer savings accounts are exempt from Michigan income taxation. MCL 565.1011(3). Qualified withdrawals are those that go towards the payment of eligible costs by or on behalf of a qualified beneficiary:
- “Eligible costs” means the down payment and allowable closing costs for the purchase of a single-family residence in this state by a qualified beneficiary. MCL 565.1003(d).
- “Allowable closing costs” means a disbursement listed on a settlement statement for the purchase of a single-family residence in this state by a qualified beneficiary. MCL 565.1003(b).
“If necessary, an account holder or qualified beneficiary may make a hardship withdrawal from the first-time home buyer savings account due to an immediate and heavy financial need of the account holder or qualified beneficiary.” MCL 565.1007(1). “However, the amount withdrawn must be limited to the amount necessary to satisfy that need.” Id. A hardship withdrawal is NOT a qualified withdrawal and will be subject to Michigan income taxes.
Also, “[i]f funds are withdrawn from an account for any purpose other than the payment of eligible costs by or on behalf of a qualified beneficiary, there is a penalty equal to 10% of the amount withdrawn” paid to the Michigan Department of Treasury. MCL 565.1013(1). However, the 10% withdrawal penalty does NOT apply to funds withdrawn for any of the following reasons:
- Withdrawn by reason of the qualified beneficiary’s death or disability. MCL 565.1013(2)(a).
- A disbursement of assets of the account pursuant to a filing for bankruptcy. MCL 565.1013(2)(b).
- Transfers from one first-time home buyer savings account into another for the benefit of another qualified beneficiary. MCL 565.1013(2)(c).
- Hardship withdrawal. MCL 565.1013(2)(d).
- Withdrawn by reason of qualified beneficiary who is a service member who is transferred or deployed out of this state on active duty pursuant to a permanent change of station order and provides proof acceptable to the Michigan Department of Treasury that the qualified beneficiary or his or her spouse is assigned to a duty station outside this state under a permanent change of station order. MCL 565.1013(2)(e).
CLAIMING THE TAX DEDUCTION
An account holder of a first-time home buyer savings account may claim a tax deduction for tax years beginning on and after January 1, 2022 to December 31, 2026 for all the following:
- “To the extent not deducted in determining adjusted gross income, contributions made by the taxpayer in the tax year less qualified withdrawals made in the tax year from a first-time home buyer savings account… not to exceed a total deduction of $5,000.00 for a single return or $10,000.00 for a joint return per tax year. The amount calculated… for a first-time home buyer savings account shall not be less than zero.” MCL 206.30(cc)(i).
- “To the extent not deducted in determining adjusted gross income, interest earned in the tax year on the contributions to the taxpayer’s first-time home buyer savings account.” MCL 206.30(cc)(ii).
- “To the extent included in adjusted gross income, distributions that are qualified withdrawals from a first-time home buyer savings account to the qualified beneficiary of that savings account.” MCL 206.30(cc)(iii).
However, taxpayers must “add, to the extent not included in adjusted gross income, the amount of money withdrawn by the taxpayer in the tax year from a first-time home buyer savings account, not to exceed the total amount [of contributions, interest and qualified withdrawals deducted] in the tax year and all previous tax years, if the withdrawal was not a qualified withdrawal as provided in the Michigan First-Time Home Buyer Savings Program Act.” MCL 206.30(dd). This does not apply to withdrawals that are less than the sum of all contributions made to a first-time home buyer savings account in all previous tax years for which no previous deduction contributions, interest and qualified withdrawals was claimed, less any contributions for which no deduction for contributions, interest and qualified withdrawals was claimed that were withdrawn in all previous tax years. Id.
An account holder shall submit a claim for the tax deduction related to the first-time home buyer savings account with his or her Michigan income tax return with the following information:
- “Account statements that show the contributions made during the tax year and the taxable interest or earnings on the account in the tax year for which the deduction is claimed.” MCL 565.1007(2)(a).
- “The Form 1099 issued by the financial institution for the account for the tax year for which the deduction is claimed.” MCL 565.1007(2)(b).
- “Upon a withdrawal of funds from a first-time home buyer savings account, a copy of the real estate settlement statement that shows that the withdrawal was used for eligible costs.” MCL 565.1007(2)(c).
THE MICHIGAN FIRST-TIME HOME BUYER SAVINGS ACCOUNT COULD BE A VALUABLE ADDITION TO YOUR TAX-PLANNING STRATEGY
Anyone considering purchasing a home for themselves or someone else for the first time could benefit from the tax savings possible under the Michigan First-Time Home Buyer Savings Program. Our lawyers are available to help advise you how to make the most of the tax benefits to be realized here.
If you have further questions or need assistance filing your tax returns, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.
