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Hybrid Car Tax Credit - Energy Bill Goes Into Effect January 2006
From Eric Powers,


Hybrid Car Tax Credit Better Than Deduction
For hybrid cars purchased through December 31, 2005, hybrid car buyers are allowed a $2000 income tax deduction, and this deduction was slated to diminish to $500 in 2006.
But thanks to the energy bill signed by the President, hybrid car and hybrid SUV buyers will begin to see even larger tax incentives for new hybrid vehicles purchased beginning January 1, 2006.

New Hybrid Car Tax Credit
The new energy bill allows a $400 to $3400 tax credit depending on model. A credit is much better than a deduction since a tax credit directly reduces taxes owed, as opposed to simply reducing taxable income.

***On A Per Automaker Basis, Tax Credit Begins Slow Phase Out Once 60,000 Hybrids Are Sold ****

The tax credit is set to expire in 2009, but for many hybrid models the incentive will end much sooner.

Once an automaker has sold 60,000 hybrid vehicles the tax credit for that automakers’ hybrids is slowly reduced over the next five consecutive quarters.

Hybrid Car Tax Credit Phase-Out Details


Beginning January 1, 2006 and up through the quarter that the automaker sells 60,000 hybrid vehicles, 100% of the credit is allowed.
100% of the hybrid car tax credit continues for the next consecutive quarter.

The next two quarters after that, the tax credit is reduced to 50% of the original hybrid car tax credit.
Then, for the next two quarters after that, the tax credit is reduced to 25% of the original hybrid car tax credit.
Finally, the hybrid car tax credit for that automakers’ hybrids drops to zero.

For manufacturers like Toyota, which expects to sell 120,000+ hybrid vehicles in 2005, the tax credit could begin to be reduced as soon as fourth quarter next year. Other manufacturers may see their hybrid cars have the full tax credit for a longer period.

Calculating The Hybrid Car Tax Credit
A few computations must be done and two tables must be consulted to determine the exact tax credit for each hybrid.

The tax credit is a mix of how much fuel the car saves over 120,000 miles (Conservation credit) and it’s fuel economy as expressed by a percentage of the 2002 model year fuel economy for its weight class (Fuel Economy credit). The better a hybrid car does in these two computations, the larger the tax credit.

You can calculate the hybrid car tax credit yourself using the tables in the energy bill, or have your tax preparer assist you.

Some people have calculated that the Prius is the winner in all this with a hybrid car tax credit of $2750, while the Accord may only receive a $400 hybrid car tax credit. The American Council for an Energy-Efficient Economy has listed their estimates for the tax credits. They also have the Prius coming out on top, but with a tax credit of $3,150, the Accord as $650. But since even these numbers have been disputed, I will wait until the dust settles a bit before reporting exact amounts for each car.

Hybrid Car Tax Within The Energy Bill
In the meantime, here is the link to the House version of the Energy Bill. The entire bill is 1724 pages long, but you can begin reading on page 1391. The section is titled “Alternative Motor Vehicles and Fuel Incentives”.

The hybrid car tax credit phaseout language is on pages 1417 and 1418.