Personal Finance 

2006 Hybrid Tax Breaks – New Rules

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.


Switch from 30 MPG Car to 60 MPG car?

Consumerism Commentary has an article about the $10,000 hybrids that Honda is planning to roll out in 2007 and wonders aloud if it’s worth it to switch from a 2004 clunker getting 30 miles per gallon to a sleek 2007 clunker getting 60 or 70 miles per gallon. It depends.

At $2.50 a gallon, a 30 mpg car pays 8.3 cents per mile driven. If you consider that the average car drives approximately 12,000 miles a year, that puts the total gasoline price at $1,000 a year. For a 60 mpg car, the total cost of gasoline is $500, a difference of $500 (not $1,000 as I erroneously wrote here before) So at $2.50/gal, the car would pay for itself (initial cost, not including taxes, titles, etc.) in twenty years. At $5/gal gasoline, that’s in ten years.

So is it worth the change? Probably, but it depends in part on how much you would “lose” if you sold the car in 2007 and bought the $10k hybrid. It also depends on whether the hybrid tax breaks are still around by the time these cars roll off the factory floor. You can also add in all sorts of other financial calculations like the interest earned on money not spent on gas, etc. but if a $10k hybrid car exist that performed well enough (I’ve never driven or rode in a hybrid car) then I’d switch in a heartbeat.

[Edited because my math skills are weak, must be all those MBA classes I’ve been sitting through.]

 Personal Finance, Taxes 

Tax Breaks for Tree-Hugging Autos

If you’ve been reading or listening to the news lately, you’ve undoubtedly heard that gasoline is going to spike 24-25 cents a gallon soon. OPEC has us by the proverbial balls. The only response is to go hybrid with our cars (you can get around 60 miles to the gallon) and Uncle Sam will (and has been for some time) give you a tax break for it.

It’s the Clean Fuel tax break and it’s worth $2,000 for hybrids. These are some of the eligible cars:

  • 2005 Ford Escape Hybrid
  • 2001-2005 Toyota Prius
  • 2000-2005 Honda Insight
  • 2003-2005 Honda Civic Hybrid
  • 2005 Honda Accord Hybrid

Want a bigger tax credit? Go fully electric and it becomes a tax credit of $4,000. A credit is different than a break/deduction, the $4,000 goes towards whatever you owe in taxes. The break only reduces your taxable income. So $4,000 going electric is worth a lot more than double going hybrid. Fully electric means the car must run primarily on an electric motor powered by batteries, fuel cells, or something else that’s electric (not gasoline!).

The rules are pretty simple and getting the break is really easy too. For hybrids, to get it you just enter the amount on line 35 of your 1040, no need to fill out a Schedule A. For full electric, it’s a little more complicated. You need to fill out Form 8834 and claim a credit of up to 10% of the cost of the car, up to $4,000.

The Rules? Only the original owner can claim the break and you can only claim it once.
When does it expire? For hybrids, 2005 is the last year it’s fully in effect, it drops to $500 in ’06, and goes away for ’07. For electric, it is in full effect for 2005 but drops to $1,000 in ’06, and goes away for ’07. Congress may decide to extend it, as it has done in the past, which may very possible if gas prices keep going the way they do. Read more details from the IRS themselves.

Update: 9/1/05 With the new energy bill signed into law on Aug 8th, the Dept. of Energy now states that:

“Starting in 2006, hybrid-car buyers and advanced lean-burn technology vehicles will be eligible for tax credits ranging from $1,700-$3,000; this credit is tied with two components: hybrids that save the most fuel compared with 2002 models, and the vehicle’s estimated lifetime fuel savings.”

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