Hybrid Tax Credit
You have to love car dealers. With the passage of the Energy Policy Act of 2005, car dealers are screaming about hybrid tax credits applied to the purchase of their cars. Here’s the scoop.
Hybrid Tax Credit
The Energy Policy Act of 2005 created a large number of tax credit to entice businesses and individuals to pursue cleaner fuel uses. Hybrid cars are one of the subjects on the tax credit menu. Specifically, the Act creates a tax credit that can be claimed by taxpayers who purchase one of these super fuel efficient vehicles.
The hybrid tax credit may be as much as $3,400. This is a HUGE tax break because tax credits are subtracted from the amount of tax you owe, not your gross income. If you can claim a tax credit of $3,400 and owe $5,000 after figuring your tax, you end up paying $1,600. Anyway you look at it, this is a very powerful credit.
There are a few problems with the hybrid tax credit. First, the tax credits only apply to purchases beginning January 1, 2006. If you purchased in 2005, you get to claim a pitiful little deduction covered later on this page.
Second, the tax credit amount is not set. As of February 10, 2006, the IRS hasn’t issued any guidance on the credit amount. The tax credit will vary from vehicle to vehicle depending on factors such as how clean it is, size and other things that a mechanic would understand. How an IRS agent understands these issues is beyond me, but such is life. Regardless, the IRS will be issuing the tax credit amounts for particular years as we move through 2006.
If you purchased your hybrid in 2005, you get no tax credit. Instead, you get to claim a deduction in the amount of $2,000. The qualifying vehicles for 2005 are:
- Ford Escape Hybrid — Model Year 2006
- Mercury Mariner Hybrid — Model Year 2006
- Lexus RX 400h — Model Year 2006
- Ford Escape Hybrid — Model Year 2005
- Toyota Prius — Model Years 2001 through 2006
- Toyota Highlander Hybrid — Model Year 2006
- Honda Insight — Model Years 2000 through 2005
- Honda Civic Hybrid — Model Years 2003 and 2005
- Honda Accord Hybrid — Model Year 2005
Obviously, tax credits are powerful incentives to by hybrid cars. This is why the are in the Energy Policy Act of 2005. Just make sure you don’t listen to any car salesperson’s claims on the exact tax credit amount until the IRS issues guidance.