Save Fuel and Taxes with New Hybrid Vehicles
Texas CPAs Say Purchasing a Hybrid Car Could Net a $3,400 Tax Credit

DALLAS — Gas prices may be on the way down, but if this summer’s high prices left your budget on empty, Texas certified public accountants say you’ll want to learn more about the tax credit available to Americans who buy qualifying hybrid vehicles. Hybrids combine an electric motor with a gasoline-powered engine, producing fewer emissions.

Beginning this year, consumers who buy environmentally friendly hybrid cars and SUVs may be eligible for an income tax credit of up to $3,400, reports the Texas Society of Certified Public Accountants. The exact amount depends on the make and model of the hybrid and the number of vehicles manufactured. The vehicle does not have to be used in a trade or business to qualify for the credit.

NEW AND IMPROVED SAVINGS

The new tax credit is better than the previous tax deduction of $2,000. That’s because a tax credit directly cuts your tax bill, reducing the tax you owe, dollar-for-dollar. A tax deduction, by contrast, reduces your taxable income.

The credit was created in the Energy Policy Act of 2005. It may only be claimed by the original owner of a new, qualifying hybrid vehicle and does not apply if you purchase a used hybrid. Additionally, the tax credit is denied if you purchase the car with the intention of turning around and reselling it.

SAVE THOUSANDS

The formula used to compute the tax credit involves calculating the hybrid’s fuel economy and total expected lifetime fuel savings. The better a hybrid does in these two computations, the larger the tax credit.

The IRS has released an official list of vehicles eligible for the credit and the 2006 tax credit amount buyers can claim on returns filed in 2007. Here are some examples:
• 2006 Ford Escape Hybrid Front WD, $2,600
• 2006 Ford Escape Hybrid 4WD, $1,950
• 2006 Mercury Mariner Hybrid 4WD, $1,950
• 2006 Lexus RX400h 2WD and 4WD, $2,200
• 2006 Toyota Prius, $3,150

UNDERSTAND THE FINE PRINT

The new tax break is a nonrefundable credit. This means the credit can reduce your regular income tax liability to zero, but it won’t produce a tax refund. So if you purchase a hybrid that comes with a tax credit of $2,200, and your tax bill is $2,000, you’ll lose $200 of the tax value of the credit. The excess credit cannot be carried over to another year.

If you are eligible for multiple tax credits, there are special ordering rules that determine which credit to take first. The hybrid tax credit is taken last after all other tax credits have been taken. You should also be aware that the hybrid tax credit does not reduce your alternative minimum tax.

Beginning Jan. 1, 2006, the full amount of the allowable credit is available through the quarter that the automaker sells 60,000 hybrid vehicles. For the next two subsequent quarters, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, the taxpayer is eligible to claim 25 percent of the credit. The 60,000th vehicle limitation applies to the total of all the qualified hybrid models sold by the manufacturer, not to each qualified hybrid model. The credits end completely in 2010.

CONSULT WITH A CPA

If you’re in the market for a new hybrid vehicle, consult with a CPA to learn how you can make the most of this valuable tax credit.

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ABOUT TSCPA
TSCPA (http://www.tscpa.org) is a nonprofit, voluntary, professional organization representing Texas CPAs. The society has 20 local chapters statewide and has 27,000 members, one of the largest in-state memberships of any state CPA society in the United States. TSCPA is committed to serving the public interest with programs that advance the highest standards of ethics and practice within the CPA profession.