Tax Incentives for Hybrid Cars in the U.S.

The United States Federal Government has passed new tax incentives for hybrid cars. The Federal Transportation Bill, called the Energy Policy Act of 2005, includes a tax credit called Alternative Motor Vehicle Credit. It takes effect for 2006 and expands tax breaks for all hybrid cars. This will give new hybrid buyers not just tax deductions, as claimed in previous years, but a credit that will reduce their tax liability. These credits can be as much as $4,000.

You don't have to itemize to claim this credit, but you will have to fill out Form 8910. This form helps to determine the amount of your credit based on which type of hybrid vehicle you buy and when you buy the hybrid.It is based on two factors- the gas mileage and the lifetime fuel savings.

The tax credit will begin to phase out after an automaker has sold 60,000 hybrid cars. In the 2 quarters following the sale of 60,000 per automaker, the credit will be reduced,50% and 25%,respectively.

A downside to this credit is for the people who have to take the (ATM)Individual Alternative Minimum Tax.This tax was created to prevent wealthy taxpayers from deductions and credits to wipe out their tax liabilities. Unfortunately, this tax has never been adjusted for inflation, so that each year more and more families are thrown into the tax bracket where they have to use the ATM. These are the families that are not wealthy by no means but have the income level most likely to purchase a hybrid.

Also, if you can claim any other kinds of credits, such as the children and dependent expenses, child tax credits, or the mortgage credit, these will have to be applied to the tax liabilities first. There are approximately 10 of such credits that will come first. If you have any liabilities left at this point, the hybrid tax incentive can only be claimed on what is left. It can not be carried forward to another tax year.

It all comes down to if a individual is looking to buy a hybrid car for the tax incentive, they need to find out from the car manufacturer the current maximum credit value of that particular car and talk to a tax professional about their tax situation so that they will know if they will be able to claim a credit at all.

Works Cited
"Hybrid Cars and Alternative Motor Vehicles" Internal Revenue Service
http://www.irs.gov/newsroom/ar ticle/0,id=157632,00.html
Updated 19 March 2007

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