Unraveling The Hybrid Car Tax Credit
A new energy bill signed by President Bush is advantageous to owners and potential owners of hybrid automobiles. Until December 31, 2005, you can still deduct hybrid cars you purchase through that date. However, because of the new energy bill, you will get an even more attractive tax incentive for hybrid cars and SUVs purchased starting on January 1, 2006. The new hybrid car tax credit will enable you to claim a $400 to $3400 credit, depending on which model you purchase. The hybrid car tax credit could be more advantageous than the old tax deduction, because it is applied directly to owed taxes, instead of reducing your taxable income.
The hybrid car tax credit won't last forever, however. The hybrid car tax credit expires in 2009. The tax incentive ends sooner than that for hybrid models. Once a car manufacturer has sold 60,000 hybrids, the tax credits for that particular car maker are phased out. Hybrid car tax credit for automakers slowly dwindle over five consecutive quarters.
Starting January 1, 2006 and continuing through the quarter when the carmaker sells 60,000 hybrids, the IRS will allow 100% of the hybrid car tax credit. The 100% hybrid car tax credit will continue through the following quarter as well. For the two quarters after that, the hybrid car tax credit is reduced to 50%. Then, for the two consecutive quarters following, the hybrid car tax credit goes down to 25%. Eventually, the credit goes down to 0%.
If you're looking to purchase a Toyota hybrid car to take advantage of the tax credit, you might want to act as soon as possible. Toyota expects to sell at least 120,000 hybrids, meaning that a reduction in tax credit could come as early as next winter. Other hybrid makers such as Ford might have a longer incentive period.
The exact amount of the credit has to be calculated following a formula. It is a combination of the amount of fuel conserved over 120,000 miles, which is the Conservation credit, and the fuel economy as expressed by a percentage of the 2002 model year fuel economy for its weight class, which is the Fuel Economy credit. You get a larger tax credit in proportion to how well the car's numbers compute in this formula.
You can check with the American Council for an Energy-Efficient Economy to see their estimates of the tax credits for different hybrid car models. For example, the Prius calculates to about $2750 to $3150, while the hybrid Accord is between $400 and $650. You can also check with the House of Representatives Energy Bill starting on page 1391 in the Alternative Motor Vehicles and Fuel Incentives section.