Hybrid Car Tax Deduction
    Tax deduction information for hybrid cars
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Hybrid Car Tax Deductions

Hybrid Car Tax Deductions 2005

If you purchased a hybrid car during tax year 2005, you can claim a $2,000 one-time deduction on your 2005 tax return. The exact savings for this tax break varies depending on your income due to it being a deduction and not a credit. That translates to a tax cut of about $700 to someone in the 35% tax bracket, about $560 for those in the 28% tax bracket and about $300 for those in the 15% bracket.

The following hybrid vehicles qualify for the IRS clean-fuel vehicle tax deduction:

Lexus RX 400h Hybrid Model Year 2006
Ford Escape Hybrid Model Year 2005 and 2006
Toyota Prius Hybrid Model Years 2001 through 2005
Toyota Highlander Hybrid Model Year 2006
Honda Insight Hybrid Model Years 2000 through 2005
Honda Civic Hybrid Model Years 2003 and 2005
Honda Accord Hybrid Model Year 2005
Mercury Mariner Hybrid: Model Year 2006

To claim the tax deduction, you don't have to itemize your taxes. Instead, you can claim it as an adjustment to your income on the regular 1040 form. To do so, write "Clean-Fuel" and the deduction amount on the dotted line to the left of line 35 of the 1040 form. Include this amount in that line's total adjustments to income.

The tax deduction is limited to new hybrid cars, but you can go back as far as 2000 if you haven't already taken the deduction. Some other information about the hybrid car tax deduction:

The deduction is a one-time deal.

The deduction only applies to the original owner.

Some states also offer tax breaks, so it's worth investigating what tax breaks your state may offer. For example, Colorado offers tax credits of approximately $3,000 on some hybrid car models.

The tax deduction was slated to diminish to $500 in 2006, but congress instead introduced a hybrid tax credit for 2006 that could be worth even more.

Hybrid Car Tax Credits 2006

President Bush signed a new energy bill into law in August 2005 which revised the Federal tax incentive program for hybrid cars. The new incentives tax credits are more valuable than the 2005 tax deductions because they are credits rather than a deduction.

The difference comes from where the money is taken out in the tax return. Tax deductions are taken out before the actual tax dollars owed are calculated meaning each dollar is only worth the percentage rate of your taxes. A tax credit, however, is a direct reduction of taxable income meaning it is worth 100% of the amount.

The formula to calculate the tax credit is quite complicated. It involves calculating the the hybrid car's fuel economy and total expected lifetime fuel savings to establish the exact tax credit. Since the information on the 2006 models is not currently available, the exact credit each hybrid model car will receive is not known. The best guestimates on what the tax credit will be worth come from The American Council for an Energy Efficient Economy (ACEEE).

The ACEEE took "the best available information" on the 2005 models and crunched the numbers. Since this is not the exact information the government will use when making the calculations, the numbers will likely be a bit different when the government issues their tax credit figures. For now it's the best educated guess available at what the tax credit will be for the following hybrid car models:

Ford Escape Hybrid (2wd): $2,600
Ford Escape Hybrid (4wd): $1,950
Honda Accord Hybrid: $650
Honda Civic Hybrid (auto): $2,100
Honda Civic Hybrid (manual): $1,700
Honda Insight (auto): $2,600
Honda Insight (manual): $0
Lexus RX400h: $2,200
Toyota Highlander Hybrid (2wd): $2,600
Toyota Highlander Hybrid (4wd): $2,200
Toyota Prius Hybrid: $3,150
Mercury Mariner Hybrid: $1,950

Upcoming Models (based on estimated specs)

Cheverolet Malibu Hybrid: $0
Chevrolet/GMC Silverado/Sierra (2wd): $250
Chevrolet/GMC Silverado/Sierra (4wd): $650
Chevrolet/GMC Silverado/Sierra '08: $900
Chevrolet/GMC Tahoe/Yukon: $1,800
Lexus GS450h Hybrid: $1,300
Nissan Altima Hybrid: $1,300
Toyota Camry Hybrid: $1,300
Saturn VUE Hybrid: $0

The tax credit beginning in January 2006 isn't a year long tax credit, but based on the number of cars sold. Each manufacturer has a set limit of 60,000 hybrids cars that qualify for the full tax credit. After a car maker sells 60,000 vehicles, the tax credit will be reduced and be phased out over a 15-month period.

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