2006 Hybrid Tax Credits:
Enticing Incentives to Go Green

by Patricia Schaefer

Tax Credits Offer Incentives to Go Green If you like the idea of driving a hybrid car, but don't like the price tag, then new, higher tax credits for 2006 might be just the incentive you need.

The 2006 hybrid tax credit may now make the purchase of a hybrid vehicle a more economical choice for middle income families and the small business person.

Taxpayers and businesses who purchase an environment-friendly and fuel-saving hybrid in 2006 are now eligible to claim up to $3,400 in federal tax credits; this made possible by the Energy Policy Act of 2005.


This is a significant and potent change from federal incentives for 2005, which granted up to $2,000 in the form of a tax deduction. Whereas a deduction reduces the income against which tax is assessed, a credit is a dollar-for-dollar reduction in tax liability. So, depending on your tax bracket, a $2,000 tax deduction might result in, for example, an actual tax dollar savings of $500, but a $2000 tax credit actually reduces tax liability by the full $2,000.

And that's not all you can save from going "green." Individual states offer incentives as well; i.e., New York State Governor George E. Pataki recently unveiled a comprehensive energy-reduction plan that would include a $2,000 hybrid state tax credit, discounted thruway tolls for hybrid vehicles, and new HOV (high-occupancy vehicle) lanes access for alternative fueled vehicles. This, coupled with the federal tax credit, would mean a potential savings to New York taxpayers of more than $5,400 if Pataki's plan is passed.

Businesses, universities, and insurance companies have even joined the hybrid incentive bandwagon. One such business is search engine giant Google, who offers $5,000 to each employee toward the purchase of a new hybrid. A number of universities are now offering parking fee discounts to hybrid owners, and Travelers will be the first auto insurance company to begin implementing a discount for hybrid owners nationwide. Their 10 percent discount will begin February 2006.


Hybrid vehicles' popularity has sharply risen, with sales increasing from a couple of hundred in 1999 when first introduced, to 205,749 in 2005. Interest spiked in '05 when gas prices soared after Hurricane Katrina. Sales Manager Tim Payton of the Smithtown, New York, Toyota dealership witnessed this firsthand: "When gas prices went up, hybrid sales went up … from about 3 to 20 sales per month." Sales rose so dramatically, said Payton, his dealership had to place a number of customers on a waiting list.

Will a new vehicle save you money in gasoline costs?
Use this gas mileage calculator to figure out your savings in fuel costs if you buy a car with better gas mileage.

Eligibility and other key criteria
Individuals and businesses who buy, not lease, a new hybrid vehicle in 2006 can take advantage of the federal tax credit. Credits range from $250 to $3,400, based on a particular model's fuel economy and lifetime fuel savings. Check with local dealers to get the specific tax credit. Under guidance released by the IRS, car manufacturers can issue a written certification specifying the dollar amount of your hybrid tax credit.

The Internal Revenue Service (IRS) and Treasury Department expect to issue guidelines with regard to rules under which lessors may be able to claim credits, according to Notice 2006-09 of the IRS Newswire. Until these guidelines are released, it would be advisable to consider any potential lessor or lessee tax credits questionable at best (At of this January 2006 writing, guidelines have not as yet been issued).

The hybrid vehicle must be used for your own personal or business use. Taxpayers may not buy a new hybrid vehicle with the intention of immediately reselling the car. The reselling of a hybrid might result in the penalty of a recapturing of the tax credit.

Individuals subject to the alternative minimum tax (AMT) need to know that this credit will not reduce their AMT.

If an individual or a business buys more than one hybrid vehicle, each would be eligible for the tax credit.

The credit is non-refundable, so while it can potentially reduce your income tax liability to zero, it cannot go below. In addition, any excess unused credit cannot be carried over to another year.

Businesses that depreciate their business assets must reduce the cost basis of a hybrid car by the allowable amount of the hybrid tax credit.

If you are eligible for multiple tax credits -- like mortgage, child and dependent care, or Hope and Lifetime Learning tax credits -- the hybrid tax credit is taken last.

Special Considerations
Once a manufacturer sells 60,000 qualifying vehicles, the tax credit begins to phase out. Popular models like the Toyota Prius -- 107,897 were sold in 2005 -- may see their tax credits reduced sooner than other competitors' models. Honda, for example, sold 43,356 hybrid vehicles in 2005 and the 60,000 threshold is unlikely to affect their hybrids' credit amounts. So, consumers may want to buy sooner in 2006 rather than later, depending on the model they choose.

If you do more city or stop-and-go driving, this may increase your hybrid fuel and money savings. Hybrids generally get better mileage in city driving than in highway driving.

How to determine if a Hybrid would make sense for you
The new federal tax credit is aimed at encouraging energy conservation and at the same time offsetting the higher sticker prices of these gas-electric vehicles. Hybrids generally cost a few thousand more than their non-hybrid counterparts, but can cost as much as $10,000 more. When you combine the latest tax incentives with the rising cost of gas, you could easily save $5,000 to $10,000 on credits and fuel over the lifetime of your hybrid.

Leaders of the Fuel-Efficiency Pack
Not only is the Honda Insight (5-speed manual transmission) the "original" gasoline-electric hybrid sold in the U.S., it is ranked as #1 in its class as most fuel-efficient: 60 mpg city/66 mpg highway. It's also number one when compared to the fuel efficiency of everything else on the road. The manufacturer's suggested retail price (MSRP) starts at $19,330.

Coming in second and third is the Honda Insight (CVT standard transmission: 57 city/56 hwy) and the Toyota Prius (ECVT standard transmission: 60 city/51 hwy). This standard transmission Honda Insight MSRP starts at $21,530, and the Toyota's MSRP starts at $21,725.

Hybrids now account for 1 percent of all new vehicles sold in the nation. Experts forecast continued growth and predict that within about six years, hybrid sales may rise to more than 4 percent. Today, consumers can choose from 11 hybrid vehicles that are available in different body styles: sedans, SUVs, a luxury vehicle, and light-duty pickups. Many more hybrids are on the horizon including 11 new hybrids set to come on the market within the next few years.

Consumers who purchase hybrids also contribute greatly to decreasing our country's dependence on foreign fossil fuels, and help to make us less vulnerable to energy price volatility. Increasing hybrid sales may indeed continue to be a valuable contribution to a greater self-sufficiency and energy efficiency amidst the global challenges we as a nation may face in the uncertain days ahead.

Copyright 2006, Attard Communications, Inc.

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