Clock is Ticking For New Hybrid Car Tax Credit

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Effective January 1, 2006, purchasers of a new hybrid vehicle qualify for a tax credit of up to $3,400. This credit begins to disappear for a manufacturer once they sell 60,000 of their hybrid vehicles. The IRS announced earlier this week that Toyota sold 41,000 hybrid vehicles in the first quarter of 2006.

With gas prices hovering at $3.00 per gallon, drivers have already begun to migrate from gas guzzling SUVs to fuel efficient hybrids. As a sign of the times, GM recently announced that they plan to discontinue the namesake of the "Hummer deduction" in favor of the smaller Humvee.

"In addition to getting better gas mileage, purchasers of hybrids are also rewarded with a sizeable tax credit through 2010," explains Andrew Schwartz, CPA, founder of CPANiche.com, a site where taxpayers can interact with CPAs who specialize in a variety of niches such as healthcare and real estate professionals. "The new hybrid car tax credit replaces the $2,000 Clean Fuel deduction that was in place through the end of 2005. But you should be aware that this credit is only available in connection with the purchase of a new hybrid vehicle, so leasing one or buying a used hybrid vehicle won't qualify."

According to the information available on the IRS' website, below are the vehicles currently eligible for this tax credit, along with the credit applicable to that model:

Ford Escape Hybrid Front WD - 2006 & 2007 $2,600

Ford Escape Hybrid 4 WD - 2006 & 2007 $1,950

Honda Civic Hybrid CVT - 2006 $2,100

Honda Civic Hybrid SUVEL - 2005 $1,700

Honda Insight CVT - 2005 & 2006 $1,450

Honda Accord Hybrid AT - 2006 $1,300 or $650

Honda Accord Hybrid AT - 2005 $650

Lexus GS 450h - 2007 $1,550

Lexus RX400h 2WD or 4WD - 2006 $2,200

Mercury Mariner Hybrid 4 WD - 2006 & 2007 $1,950

Toyota Camry Hybrid - 2007 $2,600

Toyota Highlander Hybrid - 2006 $2,600

Toyota Prius - 2005 & 2006 $3,150

Escape Clause

Even though the hybrid car tax credit runs though 2010, the credit won't be available for long on many popular models. To level the playing field for Ford and other newcomers into the hybrid market, the allowable tax credit starts to disappear for a manufacturer once they have sold 60,000 hybrid vehicles, as follows:

  • The full credit is allowed through the end of the quarter following the quarter during which the manufacturer sells its 60,000th hybrid vehicle.
  • The credit is cut in half for the subsequent two quarters.
  • The credit is then cut to a quarter of the original credit for the subsequent two quarters.
  • No credit is allowed for vehicles purchased from that manufacturer thereafter.

"The IRS recently announced that Toyota (which includes Lexus) sold more than 41,000 hybrids during the first quarter of 2006," warns Schwartz. "That means that they will most likely top the 60,000 threshold this quarter."

Even Energy Efficient Alternatives Lose to the AMT

The good news is that the new hybrid car tax credit is much more valuable then the $2,000 Clean Fuel deduction. That's because a credit provides taxpayers with a dollar-for-dollar reduction in the taxes they owe.

"The problem is that the 'Alternative Motor Vehicle Credit' won't benefit you once the Alternative Minimum Tax (AMT) kicks in," says Schwartz. "And with more and more taxpayers paying this tax each year, there's a good chance you were hit by the AMT last year. Check out line 45 of your 2005 Form 1040 to see if you paid this tax last year. If there is an amount greater than zero on that line, you're in the AMT."

Unlike other tax breaks, this credit can't generally be carried forward to a subsequent year. So anyone hit by the AMT the year they purchase a hybrid vehicle will lose out on this tax credit.

Is there any way around the AMT? Yes, if the hybrid is purchased through a business, since the credit will then qualify as "general business credit" which can first be carried back to the prior year, and then carried forward for twenty years. There's a pretty good chance that one year during this twenty-two year window most taxpayers will avoid the AMT and be eligible to claim this tax break.

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Greta Malstrom
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