Tax Deduction for Hybrid Cars
Many people ask about the tax deduction for hybrid cars. The good news is that is actually is not technically a tax deduction at all, but rather a tax credit.
The Energy Policy Act of 2005 established a tax deduction for hybrid cars put into service on or after January 1, 2006. The tax deduction is actually a tax credit. A tax deduction, technically, is subtracted from your taxable income and reduces your tax liability by a certain percentage depending on your tax bracket. A tax credit, on the other hand directly reduces the amount of tax that you must pay and is a much better deal. This tax deduction for hybrid cars is a full credit, but is subject to certain restrictions.
The credit is only available to the original purchaser of the vehicle. If the vehicle is leased, the credit is taken by the leasing company and not the customer. Although the credit is not subject to any phase out amount with individual tax payers, there is a limit of 60,000 of each qualified vehicle before the credit itself begins to phase out. In the current list, for example, the Toyota Prius has reached the 60,000 vehicle cap and there is no credit available for this model if the purchase date is later than 10/1/2007.
The Internal Revenue Service publishes the list of qualified vehicles and sets the credit amount for each model. This credit amount varies from vehicle to vehicle. The 2008 Ford Escape has a credit of $3000 which is one of the higher amounts and each different vehicle on the list has its own set credit value. In the case of the Ford Escape, this would mean that the amount of tax owed would be lowered by the full $3000 of the credit. This amounts to a virtually rebate on the purchase price of the vehicle.
The Energy Policy Act of 2005 represents a good example of the ability of the Government to use tax credits to spur the public to perform actions that are deemed to be in the public interest. To provide a tax deduction of hybrid cars would spurt the sales of such cars and encourage manufacturers to develop and produce even more of them. In the case of hybrid cars, which are defined as vehicles combining both a regular internal combustion engine and a rechargeable electric battery to power the drive train.
The Government has many reasons for offering a tax deduction or credit on hybrid cars. There are environmental and political concerns involved with the production and distribution of gasoline. The cost of gasoline has steadily been rising. This has led to a demand for alternative power sources. The hybrid car is a step in the right direction and because of this the IRS has been directed to encourage their purchase and use. As an individual tax payer, you are a double winner. Not only is your own personal expense reduced by a more fuel efficient vehicle, but you also reduce your taxes.