IRS Puts The Brakes On Hybrid Tax Credit
George and Lisa are looking for a new automobile. He wants something sporty. She wants it to handle well and drive smoothly. But they agree on one point. They're both looking for one of the new hybrid vehicles that conserve fuel by pairing a combustion engine with an electric motor. Not only will they save on gas, but hybrids come standard with a federal income-tax credit that could be worth thousands. If the couple settles on a Toyota or Lexus, however, when they buy the car could affect the size of their tax credit, or whether they get one at all.
Hybrids are the most readily available cars qualifying for the alternative motor vehicle tax credit, observes Mark Luscombe, federal tax analyst at CCH, a tax-information provider in Riverwoods, Illinois. Other categories include vehicles that run on advanced lean-burn technology or alternative fuels. The credit comes courtesy of a 2005 energy act and has been available since January 1, 2006. The car must be new, and you must be the original buyer. If you lease, the credit goes to the company leasing the car, not to you. "And if you're subject to the alternative minimum tax, you can't use this credit," Luscombe says.
For each alternative-vehicle model, the Internal Revenue Service sets the amount purchasers can claim on their tax returns. (These are dollar-for-dollar tax credits, not deductions.) The credit level is based on fuel economy, not the car's cost, says Luscombe. Take Honda's top-of-the-line, V-6 Accord Hybrid. It would probably cost George and Lisa $10,000 more than the 4-cylinder Honda Civic Hybrid. But buying the smaller car would give them a credit that, at $2,100, is $800 higher than the credit on the Accord. (For a complete list of qualifying makes and credits, go to www.fueleconomy.gov.)
Another quirk of these credits is that they're available only to a limited number of buyers, as an incentive to make you run out and buy a hybrid now, not later. Once a manufacturer has sold more than 60,000 alternative-energy vehicles, the tax credits for its models start phasing out. Toyota became the first to hit that mark, in the second quarter of 2006. As a result, the credit for all Toyota and Lexus hybrids, which Toyota also makes, was cut in half two quarters later, starting October 1, 2006, and will be reduced by another 50% two quarters after that, on April 1, 2007. There will be no tax credit for Toyota or Lexus hybrids after September 30, 2007. But the IRS has yet to clarify whether the cut-offs apply to order-ing the vehicle, paying for it, or taking delivery.
Honda, which had sold 28,408 vehicles by the end of September 2006, is currently the odds-on favorite to be the next manufacturer whose credits will be phased out.