The First Step: Savings
What’s the first step on the road to homeownership? Saving your money. And now, thanks to a new law in Alabama, building up your savings account just got easier. First-time homebuyers can now create a tax-free savings account to be used towards the purchase of their first home. That’s right, tax free! This new resource in Alabama is exclusively for first-time buyers or those reentering the housing market if you haven’t owned a home in the last 10 years.
Individuals or couples can open one of these tax-free savings accounts at any local bank, credit union or other financial institution in Alabama. The principal deposits and earnings will be deductible on your state income taxes. Savings from the account can be used to pay for the down payment and/or closing costs for the purchase of a single-family dwelling.
Check out these downloadable infographics to learn more about the availability of Alabama’s First-Time Homebuyer Savings Account Program. Be sure to contact your local REALTOR® to learn more!
Tell Me More: FAQs
A savings account for qualifying homebuyers that offers tax savings on the deposits and interest earned.
First-time or second-chance homebuyers (i.e., any Alabamian who has not owned or purchased, either individually or jointly, a single-family residence during a period of 10 years prior to the date of the purchase of a single-family residence).
Any bank, savings institution, industrial loan association, credit union, or other similar entity authorized to do business and accept deposits in Alabama.
Today. The First-time and Second-Chance Homebuyer Act was effective January 1, 2019.
If you are a qualifying homebuyer, the deposits and interest earned will help you make the purchase. Deposits reduce your income from state income taxes and interest earned is tax free.
Individuals can deduct up to $5,000 per year from their state adjusted gross income for deposits into a First-time/Second-Chance Homebuyer Savings Account. Couples can deduct up to $10,000 per year. It’s a dollar-for-dollar deduction up to the threshold (i.e. an account holder who deposits $10 into a savings account can deduct $10 from his or her state adjusted gross income; joint account holders who deposit $10,500 can deduct $10,000).
Five years, after which time any account funds not spent on qualifying costs will be included in the account holder’s taxable income.
No. Deposits are not limited. There are, however, limitations on income tax deductions from the deposits. Income tax deductions for individuals are limited to $5,000 per year for a total of $25,000 over five years, and joint savings account holders who file taxes jointly can deduct up to $10,000 per year for a total of $50,000 over five years. For example, you can deposit $100,000 in the account over the five-year period but can only deduct $25,000 or $50,000 depending on your tax filing status.
Yes. While deposits are not limited, the income tax deductions are.
The down payment and disbursements listed on the settlement statement for the purchase of a home in Alabama.
Single-family residences in Alabama, including a manufactured home, trailer, mobile home, condominium unit, or cooperative.
No. A First-time/Second-Chance Homebuyer Savings Account must be a new, separate account specifically designated as First-Time/Second-Chance Homebuyer Savings Account to be used solely for the purchase of your first home.
Not if you are a first-time or second-chance homebuyer and use the money toward the down payment and/or settlement costs of a home purchase in Alabama.
Unless the full amount withdrawn is deposited into another First-Time/Second-Chance Homebuyer Savings Account within 60 days of withdrawal, the entire account balance, including interest, will be taxed, and the amount withdrawn assessed a 10 percent penalty. The penalty will be waived if the withdrawal is due to: 1) The account holder dying 2) The account holder becoming disabled 3) The account holder exhausting unemployment compensation benefits 4) The account holder’s bankruptcy filing
No. While non-account holders can deposit funds into another’s savings account, income tax deductions are limited to the account holder.
If no other account holder is on the account, the account funds will be dispersed by the financial institution either under the terms of the account contract or as directed by law. The 10 percent penalty will be waived, but the accounts may be subject to tax as gross income. If another account holder is on the account, the living account holder may leave the account open, subject to the five-year limitation.
On your tax return, deduct from your income taxes the deposits into your First-Time/Second-Chance Homebuyer Savings Account made during the tax year for which you are filing a return. Submit to the Alabama Department of Revenue the Form 1099 for the account that you receive from the financial institution, and, if not specified on the Form 1099, a list of transactions for the account during the tax year. Consult with the Alabama Department of Revenue whether the Form 1099 you receive on the account is sufficient. Failure to provide sufficient information to the Alabama Department of Revenue may cause the entire fund to be taxed and a penalty to be incurred.
Accounts may only be opened by Alabama residents. Also, deductions from deposits only reduce income on your Alabama tax return, not income on tax returns for other states or the federal government.
Withdraw the funds from the account and use the funds to pay for eligible costs.
Upon withdrawal of funds from the savings account to pay for eligible costs, send the Alabama Department of Revenue: 1. a detailed account of the eligible costs toward which the account funds were applied 2. a statement of the funds remaining in the account, if any
Yes. The deductions for deposits only apply to your income for state tax purposes. Interest earned is still subject to any applicable federal taxes.
|Federal Taxes||Alabama Taxes|
|Deposits into First-Time/Second
Change Savings Account
|Not Deductable||Deductible up to $5,000 for individuals ($25,000 total deduction) & 10,000 for couples ($50,000 total deductions)|
|Interest Earned in Account||Taxable||Not taxable|
|Withdrawals for Eligible Expenses||No effect||Not taxable|
|Withdrawals for Ineligible Expenses||No effect||Taxable and possible penalty|
Disclaimer: This FAQ is meant to provide general information only. The FAQ is not intended and should not be construed to be legal or tax advice. Questions should be directed to a qualified legal or tax professional.
Although all Alabama financial institutions are eligible to offer a First-Time Homebuyer Savings Account, here is a confirmed list of participating banks.
Alabama One Credit Union - Tuscaloosa Branch
AuburnBank - Auburn Branch
BancorpSouth - Offered at all branches
First Federal Bank - Tuscaloosa Branch
Regions - Birmingham Branches
The Alabama Association of REALTORS® (AAR) is the largest statewide organization of real estate professionals comprised of over 16,000 members from 26 boards and 1,200 real estate companies. United by adherence to a Code of Ethics, our members work as real estate professionals in the sale, lease, appraisal, management and development of residential, commercial, rural and resort properties throughout Alabama.
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