Personal Finance 

2006 Hybrid Tax Breaks – New Rules

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A little over a year ago I wrote about the tax breaks for tree hugging autos and this time I’m here to update that article with the tax breaks for 2006. The Energy Policy Act of 2005 updated various energy related tax break laws, such as deductions for energy saving home improvements, and one of those things was to change how the tax breaks on clean fuel vehicles worked. The differences are significant and outlined below.

Here are some of the certification amounts, straight from the IRS.
Toyota Prius (05, 06) – $3150
Toyota Highlander Hybrid (06) – $2600 (2WD & 4WD)
Lexus RX400h (06) – $2200 (2WD & 4WD)
Toyota Camry Hybrid (07) – $2600
Lexus GS 450h (07) – $1550
Ford Escape Hybrid, Mercury Mariner Hybrid – $1950 4WD
Ford Escape Hybrid FWD – $2600

If your hybrid isn’t listed, it just means that the manufacturer hasn’t followed the procedures yet to get the cars certified as a clean fuel vehicle eligible for a tax credit. It takes some time, the ones listed above were all certified within the last month.

Some major changes to note:
1. It’s a tax credit now, not a tax deduction (i.e. it’s better). You get the amount of the credit off your tax bill.
2. You get the percentage of the deduction based on when you buy the eligible vehicle with respect to how many of those vehicles the manufacturer has sold. Before the manufacturer sells 60,000 vehicles, buyers get 100% of the deduction. After the manufacturer has sold 60,000 cars, that quarter and the next you get 100%. The next two (2nd, 3rd) will only give you 50% of the credit. For the fourth and fifth, only 25%, and none after that.
3. It’s an above the line credit, so you get this regardless of whether you claim the standard deduction or itemize.

Info from the IRS:
Prius, Highlander, RX2005. Camry Hybrid, Lexus GS 450h. Ford Escape, Mercury Mariner.

{ 13 comments, please add your thoughts now! }

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13 Responses to “2006 Hybrid Tax Breaks – New Rules”

  1. CK says:

    So we’re giving someone $3150 back for buying a Prius but the guy/gal who buys something like a Volkswagon TDI getting 40+ MPG that burns old french fry oil nothing. Where are the plug-in hybrids?

  2. EN says:

    My Civic has gotten 37+ mpg for the past 8 years. And that’s actual mpg, not some theoretical ideal conditions mpg that these hybrids advertise.

    I don’t understand the purpose of the tax credit. We should give credits to people who purchase fuel efficient vehicles (i.e. gas mileage above a certain threshold), not for purchasing a certain technology. My 1998 Honda Civic gets (and has been getting) better gas mileage than the Highlander, Escape, and Lexus hybrids all say they can get.

    I would be more than happy if the tax credit went to automobiles with an efficiency of 50 mpg or better. Or went to alternative fuel vehicles.

    • sandra says:

      my honda insight gets 62 mpg combined city highway. (highway it gets more like 70+) that is actually mpg after owning it since 2001 and putting bigger tires on it than is standard for it. if you factor in my living at 8000 feet in colorado for a year or so, it still gets 58mpg combined, going up mountains at high altitude with less oxygen to burn the fuel efficiently.

      this is a great car and more should be done to promote the technology. kudos to HONDA for being the first to market it AND sell the vehicles at a loss.

  3. cv says:

    Ck, Hybrids are not plug in vehicles, they run off of both electric and gas, the electric motor charges itself by the gasoline engine and a converter. The vehicle that you are speaking about (a plug in) is an electric vehicle only.

    EN, the Hybrids of which you are talking about are sport utility vehicles, most SUV’s get about 20 (if they are better on gas) to 25 MPG. The Car like models like the Toyota Prius gets approx 56 MPG.

    But that isn’t just the only thing about hybrids, the gas mileage is a great benefit of the vehicle however the other plus is that they burn the gas that they do use with less toxic gases going into the air around us. Bottom line higher MPG’s, Using less gas and a cleaner burning vehicle help the environment.

  4. CK says:


    I’m well aware of how hybrids work. Glance at this article and you’ll see what I’m talking about ;

    Seems like a great idea to me.

  5. EN says:


    I agree that a hybrid car uses less gas than my Civic. But hybrid SUVs don’t get gas mileage that’s better than my non-hybrid car. If I get better gas mileage, then (as you stated) I put out less emissions than hybrid SUVs. So where’s my tax credit?

    My point is that the tax credit doesn’t make much sense. For a loose analogy, let’s assume all cars were school children taking tests and getting rewards for how they perform. My Civic and some Toyotas (and others) got straight Bs for a while. SUVs got Fs. The Toyotas turn into hybrids and start getting As. The SUVs turn into hybrids and start getting Cs. My Civic doesn’t change and is still getting Bs.

    The Toyota hybrid gets a well deserved reward for its A. Yet the average-performing (C student) SUVs are getting rewards too. But the Civic gets nothing?

    I don’t understand the logic in the tax credit. If the tax credit is about conserving energy, why not reward energy conservation?

  6. AS says:

    you’re quite welcome for the link. Hope to see us both on future Carnivals as well. Keep up the good work!

  7. Robin says:

    I’ve been driving a VW TDI Jetta for seven years and my gas mileage has averaged 51-52 MPG throughout the year. I consider the fact that I fill up every 2-3 weeks my tax break. Given where I live and the nature of my driving, I would never get that kind of mileage with a Prius which are designed to maximize city speeds and stop and go traffic.

    These tax breaks are plain silliness. A Toyota Highlander costs (in upstate NY) $14,000 more than the traditional gas engine model. How can you possibly make up the difference in the price tag costs in a 5-8 year period? Even with a $1500 rebate it’s not feasible.

  8. Robin says:

    My mistake: $2600 rebate. Still, I don’t see that as feasible for most Americans.

  9. The Incredible Shrinking Tax Cut
    For the consumer anyway…
    Like I warned back in January, if you were planning on buying that Toyota Prius and taking advantage of the hybrid vehicle tax break, you better get going or you’re about to lose $1,575 of that credit. Toyota just…

  10. FlowerChild says:

    There are two kinds of emissions — greenhouse gas emissions and smog-forming emissions. Greenhouse gas emissions are those that are released in correlation to each gallon of gas burned — so the more fuel-efficient a vehicle is, the fewer greenhouse gases it releases. In this kind of emissions, a regular Civic at 37MPG is producing fewer greenhouse gases than a hybrid Highlander at 32MPG. The OTHER kind of emissions are smog-forming emissions; those are the particulates, nitrous oxide, sulfur dioxide, and the like, that create smog and make air difficult to breathe, aggravate asthma, etc. These are not directly proportional to the amount of gas burned; a 27 MPG Accord non-hybrid can be SULEV and release fewer of these kind of emissions than a 37MPG Civic that’s just LEV or ULEV. Most hybrids sold right now are AT-PZEV/SULEV (and the proper Bin and Tier number) and DO get very clean smogforming emissions, cleaner than the average passenger car, even though some passenger cars (Yaris, Civic, Corolla) might get better MPGs. Diesel vehicles, while fuel-efficient, fall down when it comes to particulate and smog-forming emissions. I think the credit should be for any vehicle that gets at least 40 MPG *and* SULEV/AT-PZEV emissions, but, I didn’t write the laws.

  11. Paul says:

    2002, 50mpg and Biodiesel. Why would I not get a tax break?

    A Prius get’s good gas mileage but not on renewable fuel!

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