Buying a hybrid vehicle could provide a tax break

Remember road trips? You piled all your friends in the car, rolled down the windows and drove until you got to the ocean, stopping only for a quick bite at a Waffle House. If you were older, you piled your family in the station wagon and drove to Grandma's, even if she lived in another time zone.

Sadly, road trips aren't much fun anymore. The average price of a gallon of gas rose to a near-record $3.22 a gallon Monday, and analysts expect prices to continue rising this spring and summer. That means many people can't afford to drive across town, let alone across the country.

Here's one way to lower your gas costs: Buy a more fuel-efficient car.

Saving on gas isn't the only benefit. If you buy a hybrid, which combines an electric motor with a gasoline engine, you may be eligible for a tax credit when you file your taxes next year.

Similarly, if you bought a hybrid last year, you may qualify for a credit on this year's taxes.

A tax credit is more valuable than a deduction because it represents a dollar-for-dollar reduction in your tax bill. In addition, you don't have to itemize to claim the hybrid tax credit.

But before you start shopping for a hybrid, it's important to understand that the amount of the credit can vary significantly. The credit is based on a formula that measures the vehicle's fuel economy and lifetime fuel savings.

Credits for IRS-certified hybrids range from $250 for the GMC Sierra to $3,000 for the Mazda Tribute. (You can find a complete list of hybrid tax credits at www.fueleconomy.gov.)

A vanishing credit

The hybrid tax credit was designed to offset the higher cost of a hybrid compared with a conventional vehicle. An increase in the number of hybrids has caused that premium to shrink. Unfortunately, for some hybrids the tax credit is shrinking, too. Your tax credit could be reduced or eliminated if:

•You buy a popular hybrid. Once a manufacturer has sold 60,000 hybrid vehicles, the tax credit for buyers of its hybrids gradually phases out and eventually disappears.

Toyota, which makes the Prius and Lexus hybrids, hit the 60,000 threshold in 2006. Taxpayers who bought a Prius or Lexus hybrid during the first nine months of 2007 are still eligible for a reduced credit (see box). But if you bought a Toyota hybrid after Oct. 1, "You're out of luck," says Patrick Olsen, editor of Cars.com.

Honda hit the 60,000 threshold in the third quarter of 2007. Under the phaseout system, taxpayers who bought a Honda hybrid in 2007 are still eligible for the full tax credit. The amount of the credit was cut in half on Jan. 1, 2008, will fall an additional 25% on July 1 and disappear altogether in 2009. So if you're interested in a Honda hybrid, consider buying one before June 30.

Ford Motor, General Motors and Nissan haven't hit their thresholds yet; taxpayers can claim the full tax credit on those hybrid vehicles. It's possible, though, that Ford will hit the 60,000 mark this year, Olsen says. As of the end of February, Ford had sold 47,600 hybrids.

•You owe the alternative minimum tax. The AMT is a parallel tax system that was originally designed to prevent the rich from using deductions and loopholes to avoid paying taxes. But because it was never indexed to inflation, the number of taxpayers who are hit by the AMT has expanded over the years.

This year, about 4 million taxpayers will pay the AMT. People who live in high-tax states are particularly vulnerable.

If you're subject to the AMT, you're not eligible for the hybrid tax credit. And some taxpayers who don't owe the AMT, but who are close to the threshold that would require them to pay it, could see their credit reduced. For example, if your regular tax liability is $400 more than the amount you'd pay under the AMT, your hybrid tax credit would be limited to $400.

In addition, the tax credit is currently limited to gas-electric hybrids and the Honda Civic GX, which is powered by natural gas. (That vehicle is available only in New York and California.) The E85 vehicle, which runs on 85% ethanol, isn't eligible for the tax credit, Olsen says.

An energy bill passed in the House would create a $4,000 tax credit for plug-in hybrids bought after Jan. 1, 2008. It would also provide a tax break for people who bike to work, according to Mel Schwarz, partner at Grant Thornton's national tax office. The legislation would let workers receive up to $20 a month from their employers, tax-free, to cover their cycling costs.

But if you're a bicycle commuter, don't get your hopes up. The bill, which would also increase incentives for the development of alternative energy, faces stiff opposition from Republican lawmakers and oil companies.

Sandra Block covers personal finance for USA TODAY. Her Your Money column appears Tuesdays. Click here for an index of Your Money columns. E-mail her at: sblock@usatoday.com.

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