Hybrid cars and SUVs purchased new before December 31, 2005, may qualify for the $2,000 clean fuel tax deduction. You can take advantage of tax incentives for hybrids purchased before 2005 by amending your tax return for the year when the vehicle was purchased, and it doesn't matter whether you itemize your expenses or take the standard deduction.
Hybrids Approved by the IRS as of June 2005
Hybrid SUVs
- 2005 Ford Escape Hybrid
- 2006 Lexus RX 400h
- 2006 Toyota Highlander
Hybrid Cars
- 2005Honda Accord Hybrid
- 2003-2005 Honda Civic Hybrid
- 2000-2005 Honda Insight
- 2001-2005 Toyota Prius
Watch for more hybrid cars and SUVs to be added to the list as they are introduced by automakers.
Basic Qualifying Guidelines
- You must purchase the vehicle new
- The vehicle must be for your own use, not intended for resale
- You must drive the hybrid mostly in the U.S.
- It must meet all federal and state emissions requirements
- The deduction doesn't apply to government agencies or tax exempt organizations
You might be required to return some of the money saved by the deduction if you don't meet qualifying guidelines for three years following the hybrid purchase. Your tax preparer can tell you if other conditions apply and if your state or local government offers additional hybrid incentives.
Energy Policy Act of 2005
The Energy Policy Act of 2005 puts a new spin on hybrid incentives, offering you a tax credit instead of the clean fuel tax deduction. The program applies to hybrid vehicles purchased on or after January 1, 2006.
- A tax deduction is subtracted from your income before your taxes are calculated. The amount of tax saved from a $2,000 deduction depends on the tax percentage charged for your income level--if you pay 15% tax on your income your savings would be $300.
- A tax credit is deducted from the actual taxes you owe for the year, so a $2,000 credit would save you the entire $2,000.
Actual tax credits depend on how each hybrid's stats figure in to a formula that revolves around their long term gas savings, but most will probably range from about $1,600 to $3,000--a nice chunk off of your bottom line taxes.
There are limitations to the program. It officially ends in 2009, but will end much sooner for many models, because there's a 60,000 vehicle limit placed on each manufacturer for the full deduction. It won't take long for manufacturers like Toyota, who plans to increase hybrid production significantly, to sell their tax-incentive "quota."
Most consumers who want a new hybrid car or SUV are on a waiting list to buy one. If you pass on the sale when the dealer calls, will you be shuffled backwards on the list? You might have to weigh your decision about when to purchase on the benefits you'll have from the car long term--or wait in line again for another vehicle.
The section of the energy bill that relates to hybrid vehicles is only a small portion of the 1700+ page document passed by the US Congress and signed by President Bush. Congress says this bill is meant to "jump start" hybrid sales, but will it continue to do that after the maximum number of vehicles have been sold and incentives fade away? Perhaps by that time other incentives will be available to help fuel continuing sales.
A recent survey by Kelly Blue Book found that a good chunk of the American public isn't quite ready for hybrids, but that opinion could change if gas prices continue to climb. Maybe the price of gas is the only incentive American auto buyers will need to make the switch.