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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:

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 [3].

Update: 9/1/05 With the new energy bill [4] 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.”