The Toyota Prius qualifies for the highest tax credit amount—$3,150—provided the consumer bought it during the proper time period in calendar 2006.
Why? The U.S. Energy Policy bill passed by Congress and signed by U.S. President George W. Bush in 2005 provides potentially lucrative tax credits for people who bought and put into service new hybrids and alternative-fuel vehicles in calendar 2006.
But not every taxpayer will get to use the credits, because taxpayers subject to the Alternative Minimum Tax (AMT) may not be able to benefit.
And, all taxpayers don't necessarily get the same size tax credit, even if they bought the same car.
You see, lawmakers capped the maximum tax credits at 60,000 per auto manufacturer. Meaning, only the first 60,000 buyers of fuel-thrifty hybrids and alternative-fuel vehicles from each company—as well as those buyers smart and lucky enough to buy and put into service such vehicles in the following quarter after the 60,000 level was hit—get the top credit. (Don't worry if you didn't grasp this complex formula on the first pass. I give a real-world example below.)
Car buyers who dallied or simply couldn't get their new vehicles into their driveways in a timely manner during 2006 (maybe they were stuck on waiting lists) qualify for tax credit amounts that are half what earlier buyers receive.
Toyota Most Affected
The first automaker to run into the complexities of the new federal tax provision is Toyota because it sells more hybrid vehicles than any other company. Indeed, Toyota's total hybrid vehicle sales in calendar 2006 were more than 135,000.
To get the maximum tax credit of say, a Toyota Prius for 2006, for example, a buyer needed to take delivery of his or her new Prius between Jan. 1, 2006, through the end of the calendar quarter that followed the quarter in which Toyota sold and delivered its 60,000th hybrid.
Toyota sold its 60,000th hybrid in May 2006. Let me repeat, then, that a Prius customer needed to take possession and put into service his or her new Prius (used cars don't count) between Jan. 1 and Sept. 30, 2006, in order to get the top tax credit of $3,150.
Note that this 60,000 sales level includes all Toyota hybrids, such as the Prius, Highlander Hybrid, Camry Hybrid and any Lexus hybrid vehicles on sale during this time period.
Waiting too long or being stuck in a backlog of Toyota hybrid orders where vehicle purchase, delivery and start of consumer service didn't start until Oct. 1, 2006, meant a buyer winds up eligible only for half the maximum tax credit, or $1,575.
So, some buyers of new Priuses in calendar 2006 get a $3,150 tax credit. Others get tax credits of only $1,575. The difference in the tax benefit is all linked to when they received their new vehicle.
And because the law stipulates that these tax credits continue to dwindle over time and sales, Toyota estimates that by late in calendar 2007, the tax credit for any Priuses—or any Toyota and Lexus hybrid vehicles—will be zero. There just won't be any credits left for Toyota shoppers by then.
Others Still Have Tax Credits
Toyota is the first and only automaker that faces the end of tax credits already. Again, it's because Toyota has sold more hybrids than any other company.
Honda is likely to be the next manufacturer to hit the 60,000 level, which triggers the halving of maximum tax credits. But this won't happen until sometime in calendar 2007.
And General Motors Corp. and Ford Motor Co. have plenty of tax credits available on their respective hybrids, including the Saturn Vue Green Line SUV and the Ford Escape Hybrid, because of smaller sales.
Indeed, the IRS announced that any 2005 Escape Hybrids that were sold as new vehicles during calendar 2006 qualified for up to $2,600 in tax credits.
Nissan didn't have a hybrid vehicle during calendar 2006. It added the 2007 Altima Hybrid early in calendar 2007, which qualifies for a $2,350 tax credit.
It's worth point out that the tax credits don't last forever. Even if they're not all used up by each company, the credits stop in 2010, according to the law.
Different Credits for Different Vehicles
A further disparity in the tax credits stems from the kind of vehicle purchased and has nothing to do with the price of a hybrid vehicle.
The maximum tax credit for a Highlander Hybrid and Camry Hybrid is $2,600, or $550 less than for a Prius. Yet both the Highlander Hybrid and Camry Hybrid are higher-priced than the Prius. Meanwhile, a buyer of a more than $40,000 Lexus RX 400h hybrid can only get a maximum $2,200 credit.
The government established different tax credit amounts based on the fuel savings and reduced emissions that each vehicle produces.
The vehicles with the smallest tax credits are the sibling GMC Sierra Hybrid and Chevrolet Silverado Hybrid pickup trucks. They qualify for maximum $250 tax credits.
On average, hybrid car buyers stand to take a tax credit of maximum $1,639, factoring in the 13 hybrid nameplates that were on the market in 2006.
Another Surprise
Don't assume that just because a hybrid has a high fuel economy rating, it gets a big tax credit.
Indeed, the hybrid vehicle with the top fuel mileage in the country for 2006—the 2-seat Honda Insight, which was rated by the federal government at 60 miles a gallon in city driving and 66 mpg on the highway for a car with manual transmission—qualified for a $1,450 credit, or less than half that of Toyota's Prius.
The Insight, by the way, ended production in calendar 2006 and is not offered for the 2007 model year.
Other Details
Eligible vehicles had to be put into service during the time periods specified. This means that the purchase needed to be completed and finalized and the vehicle registered and licensed.
Vehicles that went into service Dec. 31, 2005, or earlier—even though they might have been 2006 model year vehicles—are not eligible for the new tax credit.
Also note that the tax credit is given only one time per vehicle, and it goes to the original owner, not to the buyer of a used hybrid.
A Tax Law Change
Because these new tax breaks are credits, which are subtracted directly from a taxpayer's federal income tax bill, they are viewed as more valuable than the $2,000 maximum tax deduction that hybrid buyers used to be eligible for.
Tax deductions reduce taxable income but are not necessarily a one-for-one reduction in the total tax bill the way tax credits are.
The hybrid and alternative-fuel vehicle tax deduction expired with 2005's tax year and was replaced by the tax credits.
Additional information can be found at the IRS website at www.irs.gov.
Ann Job is a freelance automotive writer.
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