Two cars were recently qualified by the Internal Revenue Service for the hybrid tax credit enacted by the Energy Policy Act of 2005: The tax credit for hybrid vehicles applies to vehicles purchased on or after January 1, 2006, and may be as much as $3,400 depending on the fuel-efficiency of the vehicle. The newest hybrid vehicle qualified by the IRS are:
- 2007 Toyota Camry Hybrid $ 2,600
- 2007 Lexus GS 450h $ 1,550
The hybrid tax credit replaces the tax the ‘clean-burning fuel deduction’ of $2,000, which was previously allowed for taxpayers who purchased a new hybrid vehicle before December 31, 2005. Many currently available hybrid vehicles qualify for this new tax credit including:
- 2005 Toyota Prius $3150
- 2006 Toyota Prius $3150
- 2006 Toyota Highlander 4WD Hybrid $2600
- 2006 Toyota Highlander 2WD Hybrid $2600
- 2006 Lexus RX400h 2WD $2200
- 2006 Lexus RX400h 4WD $2200
- 2006 Ford Escape Hybrid Front WD $2,600
- 2006 Ford Escape Hybrid 4 WD $1,950
- 2006 Mercury Mariner Hybrid 4 WD $1,950
The hybrid tax credit is a "step down" credit. That means is you purchase a hybrid you only have a certain amount of time to claim the full amount of the credit; the longer you wait, the less you can claim. You are allowed to claim the full amount of the allowable credit for the hybrid vehicle you purchase only up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. That means that if Lexus records the sale of its 60,000 vehicle in May of 2006 (the second quarter of the year), you could claim the full amount of $1,550 through the end of the third quarter of the year, or at the latest September 29th (the last workweek day in the third quarter).
For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, you can only claim 50% of the allowable credit. For the fourth and fifth calendar quarters, you may claim 25% of the allowable credit. No credit is allowed after the fifth quarter. If you’re planning to purchase a hybrid you should do so earlier in the year if you want to claim the full credit.
What is the difference between a tax credit and deduction?
A credit is a direct dollar-for-dollar reduction of your tax liability independent of your tax bracket. For example, a $1,500 tax credit will lower your tax liability by $1,500. On the other hand, a tax deduction is like an expense that is subtracted from your adjusted gross income when calculating your taxable income. A deduction reduces your tax liability only in proportion to your tax bracket, or in other words the percentage or rate of taxes you pay. Whereas tax deductions don’t need to be itemized to claim them, credits must be itemized. To claim your credit use Form 3468.
.
Share your thoughts and tips in the comments section below.
Follow Us
