A new law went into effect this year that provided for the creation of First-Time Homebuyer Savings Accounts (FTHSA.) These accounts are special savings accounts that allow for tax deductions to the account holder. In order to qualify as a FTHSA, the account holder, upon opening the account, must designate a beneficiary of the account who qualifies as a first-time homebuyer. A first-time homebuyer is an Iowa resident who has not owned a single or multifamily residence for at least three years.
The beneficiary may either be the account holder or someone else. For example, a parent who already owns a home could open a FTHSA and list his or her child as the beneficiary provided the child qualified as a first-time homebuyer. Additionally, an individual may open multiple accounts provided each account has a different beneficiary (e.g., a parent could open three different account for his or her three children.)
For 2018, individual account holders may deduct up to $2,000 annually ($4,000 for married couples filing jointly) from their Iowa income tax for contributions made to the account. In addition to the annual deduction limit, the account holder is also subject to a lifetime limit of ten times the account holder’s annual deduction limit. In other words, if the annual deduction were to remain at $2,000 for ten years, an individual account holder would be subject to a $20,000 lifetime deduction limit for the account.
In addition to the account holder’s ability to make deductions on account contributions, the account holder may also deduct interest accrued on the account. It is important to note that if a withdrawal is made from the account for any non-qualifying purpose, such as to pay for a new car, the account holder will need to add that amount to his or her net income for the year to make up for the tax deduction he or she previously received due to putting that money into the account. Finally, account holders must fill out an annual report form and include it with their Iowa income tax return each year.
If a FTHSA sounds like something you would be interested in, contact a financial advisor for further information.