At a glance:
- 50% of home buyers save for five years prior to their first home purchase.
- As a benefit of recent legislation, Michigan residents can save for a down payment for their first home, using a tax-free savings account, using the Michigan First-Time Home Buyer Savings Program.
- Savings accounts can be opened at a bank, credit union, or borrowers may save using securities and investments with the help of a financial advisor.
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What is the First-Time Home Buyer Savings Program?
Starting in January 2022, following the passing of House Bill 4290 and Senate Bill 145, Michigan residents are eligible to open a savings account, or designate an existing savings account, specifically to save money tax-free for their first home purchase.
While First-Time Home Buyer Savings Accounts (FHSA) are common in other states, this is the first of its kind in Michigan.
The Michigan First-Time Home Buyer Savings Account can be opened or contributed to by parents, guardians, or grandparents, and assigned to a qualified beneficiary. This tax-incentivized program closely follows the education savings plan, which allows for the tax-free saving of funds for education-related expenses.
The tax-exempt savings account benefits will last from 2022 through 2026. While contributions and deductions can be claimed for tax years 2022-2026, interest deductions may be claimed for tax years after 2026.
Additionally, this savings account is separate from the Michigan First Home Down Payment Assistance (MSHDA), which helps first-time buyers by providing up to $7,500 in down-payment assistance.
How does it work?
To start, a Michigan resident must open a new savings account with a bank or investment firm, or designate an active account.
No matter the account, account holders must declare the account’s purpose on the current year’s state income tax returns. This activates a deduction in state income tax collection for the value of the account (at the time of writing, proper forms have yet to be distributed— talk to a tax professional for more information).
However, there are limits to the maximum deductions and contributions on the Michigan FHSAs. For single filers, there is a $5,000 deduction, while joint filers can deduct a maximum deduction of $10,000. The maximum contribution for this program is $50,000.
Contributions, accrued interest, and qualified withdrawals are all exempt from Michigan’s state income tax if the funds are used for a buyer’s first purchase—specifically a single-family home (including manufactured homes, condos, or co-ops). These funds can be used toward a down payment, closing costs, and other associated fees, no less than one year after the account is designated.
A person may open multiple Michigan FHSAs; account holders can change the beneficiary at any time but cannot name the same beneficiary on multiple accounts. However, an individual may be named the beneficiary on multiple accounts if each account is owned by a separate person.
Following the home purchase, account holders must submit a form with their state income taxes, stating how the funds were used in their home purchase. The bank or credit union that holds the account will issue the account owner a Form 1099 for the tax year which the deduction is claimed.
Any funds withdrawn by the account holder or beneficiary not used for a home purchase may be subject to an early withdrawal penalty of 10% unless the funds are needed in times of immediate financial need.
Am I eligible?
To qualify for the program, you must:
- Be a Michigan resident.
- Not have purchased or owned a home in the last three years.
- Use the funds for any fees associated with the home purchase.
How do I start?
To open a Michigan home buyer savings account, you’ll need to visit a bank or credit union located in Michigan or talk to a financial advisor. To designate a current account, you will need to declare the account on your current year’s tax returns (i.e. if you designate an account in 2022, you must declare the account on your 2022 tax return, in 2023). The State of Michigan has not publicly released the tax paperwork at this time, but is expected to release them in time for the 2022 tax filing.
Although it is likely that there are a handful of banks, credit unions, and financial services companies in Michigan who are able to help first time home buyers set up an account for this program, currently the only company that has confirmed that they can help is For Fiduciary, a local team of financial advisors headquartered in Grand Rapids, MI.
Working with an advisor for the Michigan First-Time Home Buyer Savings Program has three steps: introduction, account opening, and funding/investing. Prospective homebuyers can schedule an introduction call with an advisor. The introduction call provides an opportunity to flush out some of the details (time frame, funding amounts, etc.) with the Michigan First-Time Home Buyer Savings Program. Additionally, this is a time for the Advisor to learn more about the client. Fiduciary advisors are bound to always put our clients’ interests first, no matter what. This includes working with you every step of the way to ensure all of your needs and wants are accounted for and taken into careful consideration.
After the introduction call, FA will assist you in opening a brokerage account (either individually or joint). Here is where the Michigan First-Time Home Buyer Savings Program comes to life. After designating the account via tax forms, the account will be successfully enrolled in the program. After establishing the account, funding/investing can begin. Fiduciary Financial Advisors works with you to come up with a custom portfolio suited for your interests and timeframe. If you would like to explore this further, please contact an advisor for an introduction call.
Treadstone Funding and its employees are not financial advisors or tax professionals. Please contact a licensed financial advisor and/or tax professional before proceeding.
For questions or to get started with the first time home buyer savings program, connect with us!
New bill allows Michigan residents to save tax-free for their first home!