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.

Share This

Filed under: Tax Infomation by admin
No Comments »

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.

Share This

Filed under: Tax Infomation by admin
No Comments »

With the recent push by President Bush for alternative fuel strategies, much confusion has arisen regarding tax incentives for hybrid vehicles. This article clarifies the issue for you.

Tax Deductions for Your 2005 Hybrid Automobile

People buy hybrid vehicles for different reason. They are good for the environment. They get much better mileage, which saves money. There are tax incentives for buying them. With the recent energy plan put in place by the federal government, there is a lot of confusion regarding the tax incentives.

Specifically, the question for most people is whether they can claim a tax deduction or a tax credit when they buy a hybrid. Here is the breakdown:

The Good - If you purchased a hybrid vehicle in 2005, you can claim a tax deduction.

The Bad - If you purchased a hybrid vehicle in 2005, you cannot claim a tax credit.

The Ugly - If you had waited till 2006, you could have claimed a tax credit.

Tax credits save you a lot more money than tax deductions. Tax deductions are applied to your gross income like any other deduction. This helps lower your tax bill, but tax credits are much more powerful. Tax credits are not taken out of your gross income. Instead, tax credits are taken out of the exact amount of tax you owe the government. If you owe the government $10,000 after filling out your tax return and can claim a $2,000 tax credit, your final tax bill is $8,000.

You are stuck with a tax deduction tax deduction if you purchased a hybrid in 2005, but at least it is a nice one. The deduction amount is $2,000 for vehicles certified by the IRS. They include:

Ford Escape Hybrid: Model Year 2006

Mercury Mariner Hybrid: Model Year 2006

Lexus RX 400h: Model Year 2006

Ford Escape Hybrid: Model Year 2005

Toyota Prius: Model Years 2001 through 2006

Toyota Highlander Hybrid: Model Year 2006

Honda Insight: Model Years 2000 through 2005

Honda Civic Hybrid: Model Years 2003 and 2005

Honda Accord Hybrid: Model Year 2005

To claim this deduction, you must have purchased a NEW hybrid. If the hybrid was used, you get nothing. Assuming it was new, the deduction is claimed on line 36 of the 1040 form. Make sure to write Clean Fuel in the space provided.

Richard A. Chapo is with BusinessTaxRecovery.com - providing information on tax and taxes. Visit us to read more tax articles and our new tax credits page.

Share This

Filed under: Tax Infomation by admin
No Comments »