Personal Finance, Taxes 
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Tax Breaks for Tree-Hugging Autos

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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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4 Responses to “Tax Breaks for Tree-Hugging Autos”

  1. Omar says:

    25 CENTS A GALLON!? When is that supposed to happen?

    The only news I get is from Jon Stewart, and he hasn’t mentioned it so what’s why I ask. Although he did mention that The Rock will be starring in a movie based on the Doom video game. And now I see that it’ll cost an additional 25 cents to go see it.

    We’re seriously considering a hybrid for my wife’s next car. Good to know about the tax breaks, though I really do hope it’s extended. The US really has to struggle free from its oil dependency.

  2. jim says:

    Your wife… wow that sounds scary. I remember when you used to copy my homework.

    Gas prices has been big news lately, here’s an article:
    Gas could head to $2.15

    Quit living under a rock.

  3. Omar says:

    Base gas prices in Under a Rock, NY are $2.03, so it looks like I’m on the high end of the average. Wonderful.

    BTW, you were a great teacher. I now have the role of “supplier” in grad school. … Wow, things really have changed.


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