Claiming First time homebuyer exemption and reducing tax liability for 2025

[deannarippy]

MFJ and one dependent. We took about $18-$20k from our Roth IRAs this year for a purchase of home as first time homebuyers. I max out my FSA contributions, husband does HSA, and we both contribute to Dependent FSA. We both contribute pre-tax/Roth to our 401ks, we donate $1-2k/year to church, and for the first time will have mortgage interest. We don't expect to be able to itemize due to the higher standard deduction, but since the TCJA, we have ended up owe taxes every year. If it doesn't sunset (or they don't make adjustments to the standard deduction with this new tax bill), how can we claim the first time homebuyer exemption on the first $10k we withdrew and also be proactive in reducing our tax liability next year?

[VolvoGirl]

The 10,000 exemption is only for the 10% Early Withdrawal Penalty on Traditional IRA withdrawals.  If you only withdrew from a ROTH IRA it is not taxable so there is no penalty to exempt.  

[Cindy4]

For clarification, there currently is no first time homebuyer exemption for federal tax purposes, but there is an exception to the early withdrawal penalty from qualified retirement plans.  In TurboTax you will be prompted, when you enter the information from the 1099-R that you will receive, with questions regarding why you took the early distribution and then presented with a list of exceptions.  You'll simply checkmark the box for first time home buyer.  There may be a state level exemption or credit of some type, but all of the states vary so widely you will need to check with the state department of revenue. 

We can't provide tax planning in this forum, but here are some tips from our experts.  When looking at reducing your tax liabilty there are things you could consider such as increasing charitable giving to combine with the other items included when itemizing deductions, such as the mortgage interest you mentioned.  You can also get an itemized deduction for state and local taxes.  This would include property tax, sales tax, and income taxes. 

@deannarippy Hope this helps!
Cindy

[deannarippy]

@VolvoGirl I'm sorry but that's not true if you withdrawal the earnings as well.

[deannarippy]

Thank you Cindy for providing a little more context. Yes, I was referring to the 10% early withdrawal penalty on the earnings of the Roth contributions we withdrew. Unfortunately, we don't have the cash flow to make additional charitable contributions and as I mentioned, with the higher standard deduction, I'm not sure we'll be able to itemize for Federal. Itemizing for State is fine and we usually get a refund, but it just offsets what we end up owing to the Feds - we just pass it from one entity to another. I'll check out the link and see if there's some more specifics on what I can do on the W-4 or other items besides increasing our withholding.