How it Works: Hybrid Tax Breaks

How it Works: Hybrid Tax Breaks

The Feds want you to buy a hybrid. Really…they do, and to back it up they’re offering a tax credit of up to $3,400 for hybrids purchased after 2005. Basically, the amount depends on the efficiency of the model -- based on the average fuel economy in 2002 -- and the expected fuel conservation during the life of the vehicle, as well as an emissions rating qualifier. In essence, the better the conservation, the bigger the tax credit. In order to claim the credit, you’ll need to fill out Form 8910, Alternative Vehicle Credit. Be sure to check with a tax professional about these credits, however, as there are specific exclusions depending on your tax status. There’s also a catch to the credit. When an automaker sells 60,000 hybrids, the credit dips to 50 percent of the total, starting in the following quarter -- then another 50 percent during the next quarter until the credit gets to zero. So far, only Toyota has hit the 60,000 vehicle threshold; see the following pages for actual credit adjustments beginning in October, 2006. You can also expect that Honda will be at the limit soon, followed by Ford.

Additional Incentives

Your state and local governments are happy to help you with the purchase of a hybrid vehicle, so check your state’s website. Colorado, for example, offers a $4,713 tax credit. Other state-based incentives include free parking and single occupant HOV lane access in states such as California, which allows access for vehicles that meet its Super Ultra Low Emission Vehicle (SULEV) classification, and are rated at 45 or more miles per gallon. Ask your dealer about getting HOV lane stickers, or visit your state website. Corporations are also beginning to get the gas/electric mojo going, with the likes of Bank of America, and Google offering incentives to their hybrid-happy employees. Perhaps they should offer the same reward for car-poolers and train-takers, eh?

2006 Toyota Prius

Credit: $788
Status: Over the 60,000 limit; Prius credits will scale down to $1,575 in October, 2006 and $788 in April of 2007.
Pros: Real world fuel economy of around 45 miles per gallon, rated at 60 in the city and 51 on the highway. Hatchback utility, futuristic design and a Partial Zero Emissions Vehicle (PZEV) rating.
Cons: A bit slow after initial acceleration, virtually impossible to buy without paying sticker price or higher. Is it possible that the Prius is too trendy?