Hybrid Vehicles and Tax Benefits


You have to love car dealers.

With the passage of the Energy
Policy Act of 2005, car dealers are screaming about the tax
benefits of buying these vehicles. Here's the scoop.
Deductions and
Credits
The Energy Policy Act of 2005 made a major modification to the
tax benefits of owning a hybrid
vehicle in an effort to entice
businesses and individuals to pursue cleaner fuel uses. The primary
switch was to move the tax benefits from deductions to credits.


Specifically, the Act creates a credit that can be claimed by
taxpayers who purchase one of these super fuel efficient
vehicles.
Taxpayers can now claim a credit of as much as $3,400 per
vehicle. This is a HUGE tax break because credits are subtracted
from the amount of tax you owe, not your gross income. If you can
claim a 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 tax savings benefit.
There are a few problems with the new credit for hybrid
vehicles. First, the credits only apply to vehicle purchases
beginning January 1, 2006. If you purchased in 2005, you get to
claim a pitiful little deduction covered later on this page.


Deductions have much less impact on your taxes since they are
applied to gross earnings.
Second, the credit amount is not set regardless of what dealers
or the media is saying. As of February 10, 2006, the IRS hasn't
issued any guidance on the credit amount. When it does, the IRS
will set a particular credit amount for each vehicle and model.

In
coming up with a figure, the IRS analyze how clean the vehicle is
from an emissions point of view, the 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 credit amounts for particular vehicles as we move
through 2006.
If you purchased your hybrid in 2005, you do not get to claim a
credit against the amount you owe Uncle Sam.

Instead, you claim a
deduction in the amount of $2,000 from your adjusted gross
earnings. While this doesn't have nearly the impact of a credit, at
least you get something.
Catalogue: Finance
Title: Hybrid Vehicles and Tax Benefits By: Richard A. Chapo

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