Finance Tax Time

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.

Richard A. Chapo is with BusinessTaxRecovery.com - obtaining tax refund recovery for overpaid small business taxes. Visit BusinessTaxRecovery.com to read more business tax articles.

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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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