Finance Tax Time

If you purchase a new hybrid car after January 1, 2006, you can get a major tax credit for doing so. Alas, the tax credits applicable for Toyota hybrids are about to be cut in half.

The government uses all types of methodology to modify our behavior. While many look for nefarious conspiracies and such, the government usually does it right before our eyes. The most obvious area of behavior modification is with taxes. In this case, the government has made an effort to boost energy conservation by giving us massive financial incentives to purchase hybrid vehicles. The incentives come in the form of tax credits.

A tax credit is the golden egg of taxes. Whereas a tax deduction, such as the mortgage interest deduction, is used to lower the adjusted gross income you will have to use to figure out the amount you owe off the tax tables, tax credits get right to the heart of the matter. You see, tax credits are deducted dollar for dollar from the amount of tax you owe. If you figure out your adjusted gross income, go to the tax tables and then figure out you owe $8,000 for the year, the tax credit is then subtracted from this amount. Golden egg, indeed.

In the case of hybrids, the government wants to motivate us to buy them, but only to a certain extent. The government is more or less trying to make them an acceptable part of our society, not give them a free ride forever. As a result, the tax credits applicable to the purchase of hybrids phase out after certain sales goals are met. Specifically, the tax credits start being reduced once a manufacture sells 60,000 hybrid vehicles. The IRS reviews the sales number each quarter to keep a tab on how the manufacturers are doing.

In the case of Toyota, the IRS has determined that the company reached the 60,000 mark this last quarter. Specifically, it hit the mark in May. As a result, the tax credit that can be claimed for buying a Toyota hybrid will begin to be phased out. Beginning in October 2006, the tax credit for each model of Toyota and Lexus [owned by Toyota], will be reduced by a whopping 50 percent. In April of 2007, the credits will be cut again, this time to 25 percent of the original credit amount. In October of 2007, the credit will be terminated completely. The tax credit amount is determined by vehicle, so you will have to determine the equivalent cut for the model you are interested in.

If you have been paying attention to the dates, you may have noticed something interesting. The reduction for the Toyota hybrid tax credit does not happen immediately. You can still go out today, purchase a Toyota hybrid and claim the full tax credit. Once we roll into October 2006, that will no longer be the case.

Richard A. Chapo is with BusinessTaxRecovery.com - providing information on tax credits.

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The Energy Act of 2005 created major tax credit incentives for people purchasing hybrid vehicles. The IRS has recently concluded the quarterly review of manufacturers and issued tax credit status.

IRS Updates Hybrid Tax Credits Following Industry Audit

As part of the Energy Act of 2005, the federal government took a major step towards promoting the use of hybrid vehicles. In simple terms, it converted the tax deduction for purchasing a hybrid vehicle into a tax credit. This change was remarkable because a tax credit is very valuable because it is a reduction from the actual amount of tax you owe, not your gross income. Given the fact the tax credit could be over $3,000 for some models, this was a major boon for hybrid car sales!

Alas, the hybrid tax credits were not set in concrete in the tax code. Instead, they are known as phase out credits. In this case, the amount of the tax credit is first set by the IRS after a review of the car model in question. Each quarter, the IRS then totals all of the hybrid sales by manufacturer. Once the total sales reach certain milestones, the tax credit amount is reduced by a percentage. Eventually, the credits are completely phased out and the relevant automobile executives openly weep.

The magic sales threshold for hybrid manufacturers is 60,000 cars sold. Once a manufacturer hits this level, the credits phase out in a labored manner as is typical with taxes. Once the 60,001 car is sold, you still have until the end of the next quarter to buy and claim the full tax credit. Once that date is passed, you can still claim a credit for a new purchase, but at a rate of half the credit amount originally assigned by the IRS so long as you buy during the next two calendar quarters. After those dates pass, the credit is reduced to 25 percent of the original amount for two more credits. Thereafter, it is eliminated completely. Nice and simple, eh?

The IRS recently completed the quarterly audit for the manufactures. As of June 2006, the credit amounts for any Toyota hybrid have been cut in half as the company has met the first hybrid sales threshold. All other manufacturers, however, still qualify for the full tax credit amounts as they have not met said sales levels. The manufacturers include Honda, Ford and GM.

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The IRS is working its way through various automobiles that qualify their owners for tax credits. The Saturn model of cars has just been reviewed with one particular model being approved.

IRS Approves Saturn Vue Green Line for Tax Credit

Owning a hybrid car was pretty much a financial windfall from the outset. The cars provided tremendous savings on fuel costs. With gas costing a vicious $3.90 a gallon in San Diego, the savings are not to be understated. On top of this, the purchase of these vehicles also provided the owners with a $2,000 tax deduction, a very nice perk indeed. In 2005, things got even better.

The passage of the Energy Policy Act of 2005 was something of a godsend to hybrid vehicle manufacturers. Frankly, the CEOs of these companies must have dropped to their knees and openly wept. This moment of humanity had everything to do with the change of one word in how hybrids were viewed for tax purposes. Individuals who purchase new hybrids approved by the IRS no longer where eligible for a tax deduction. Nope. The word “deduction” had been changed to “credit”, a massive difference in the world of tax returns.

A tax credit is so much more valuable than a tax deduction it isn’t even funny. A tax deduction is an amount that reduce your adjusted gross income. Once all deductions are taken out, you then head to the tax tables and figure out what you owe. A tax credit, on the other hand, isn’t taken out of your gross income. Instead, you claim all you deductions, go to the tax tables to figure out what you owe and then apply the tax credit to that amount. For instance, if you determine from the tax tables that you owe $10,000 in taxes for the previous year, you can then reduce this amount by the tax credit.

In this case, we are talking about the tax credit amount issued by the IRS for the Saturn Vue Green Line. For the 2007 model year, you can claim a tax credit of $650. You must purchase the car new from the manufacture [thus the weeping CEO]. Moreover, the amount of the credit starts falling after the 60,000th vehicle is sold, so you need to go buy one now [more weeping and hysterical laughter from the CEO].

Most people complain about a lack of tax deductions when it comes time to file tax returns. Tax deductions are nice, but tax credits are where the real savings occur.

Richard A. Chapo is with BusinessTaxRecovery.com - providing information on tax credits.

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