Hybrid Vehicle Tax Credit

Buy a car, save the planet, right? Political concerns aside everyone can agree that spewing a little less carbon into the atmosphere is a good thing. Even the IRS agrees with that. In fact they offer a tax credit for buying a hybrid. But don’t go thinking that claiming this credit is going to be a simple process. Attempting to claim it isn’t that hard, but actually receiving it may seem to be as much a matter of luck as it is anything else. That isn’t entirely the case; knowing how the IRS arrives at the amount of the credit will go a long way toward increasing it.

The form for claiming the credit – Form 8910 Alternative Motor Vehicle Credit – is relatively short and can be filled out by anyone with a calculator. But it is more complicated than simply subtracting the standard hybrid fuel deduction from the total tax. There is no standard deduction; it is a credit that is calculated based on a number of complicating factors.

The first sticky wicket in this credit is that different models come with different allowed credits. For instance, Vehicle X may deliver only a $400 credit while Vehicle Y may allow the taxpayer to take $2400. That’s quite a difference. Different credits are allowed for different models because different models have different efficiencies. One of the points of the credit is to encourage people to buy hybrid vehicles. Since this comparatively new technology is still more expensive than that in standard vehicles the government is kicking in a little incentive for purchases. But this incentive is based on how much benefit is derived from the technology. Vehicle X only reduces a little of the carbon in its emissions while Vehicle Y reduces it by a lot. So the credit allowed for Vehicle Y buyers is more. But to compare these emissions reductions a base needs to be established. As described in the Energy Tax Incentives Act of 2005 the base is determined by the emissions of the models 2002 emissions, the vehicle weight and its new cost.

This brings us to the next consideration in determining the alternative fuel vehicle credit. It must be purchased new. Simple enough, right? Once the vehicle is already out in the market, there is no reason for the government to try to provide incentive for owners to sell it to new owners; there’s no net benefit to that. But what about leased vehicles? According to the Summary of the Credit for Qualified Hybrid Vehicles the owner, not the person leasing the vehicle, gets the credit. Again, if you consider this from the government’s perspective this makes sense. When the leasing company buys the vehicle it’s already been put into use. The IRS would have no interest in trying to influence what’s done with it after that. One would hope that the leasing company would pass the savings, or at least some of them, on to the customer but that doesn’t really enter into this conversation.

It’s also important when the vehicle is purchased. The credit decreases and eventually disappears in time based on the number of vehicles the manufacturer sells. The magic number is 60,000. This means that the credit starts to fall after the manufacturer sells the sixty thousandth vehicle of a particular model. More precisely, it starts to fall at the end of the first calendar quarter after the quarter during which the manufacturer reached that magic number of sales. After that it falls to one half of the credit then six months later to one quarter of the credit. After another six months it disappears entirely. This puts an incentive on the taxpayer to buy the most efficient vehicle as quickly as possible.

Though most car buyers are probably considering more than the possible tax credits when they choose alternative vehicles it’s good to know that the government is willing to help a little. But it takes more than simply choosing a hybrid to get the maximum tax benefit. Knowing which models will bring the most benefit is important and can save the taxpayer quite a bit of money come tax season.