Tax Credits for Fuel-Saving Autos

HYBRID CARS MADE a splash in 2005 when Congress passed legislation that created tax credits aimed at encouraging shoppers to buy (not lease) new (not used) energy-efficient vehicles. That spurt of publicity helped make hybrids like the Toyota Prius popular. Since then, however, the excitement has died down — and so have the credits themselves for hybrids made by Toyota and Lexus, which are slated to soon phase out altogether.

Credits for Hybrid Vehicles

Hybrid vehicles combine an internal combustion engine with a second engine that runs on rechargeable batteries. Tax credits for hybrids can range from as low as $250 to as high as $3,400. At least, that's the theory — no vehicle has qualified for this upper limit yet. Unless Congress extends them, these hybrid credits will disappear after 2010. Until then, they can be very helpful because they reduce your tax bill dollar for dollar. However, watch out if you're a victim of the dreaded alternative minimum tax (more on that later).

Beware of Phase-Out Rule

By far, the Toyota Prius is the most popular hybrid. Honda and Lexus have also produced strong sellers in the past couple of years. Perversely enough, however, that popularity has a negative impact on the hybrid tax credits. Once a manufacturer sells more than 60,000 qualifying hybrids, the credits for all hybrid models produced by that auto maker are reduced by 50% for a six-month period and then by 75% for the following six-month period. After the end of the second six-month period, the credits simply disappear.

IRS-Approved Tax Credits for 2007 and 2008 Model Year Hybrids
Toyota and Lexus Hybrids	Now through 9/30/07	Later
2007 Toyota Prius	$787	0
2007 Toyota Camry	$650	0
2007 Toyota Highlander 2WD & 4WD	$650	0
2007 Lexus RX 400h 2WD & 4WD	$550	0
2007 Lexus GS 450h	$387	0
Honda Hybrids	Now through 9/30/07	Later
2007 Honda Accord	$1,300	N/A
2007 Honda Civic	$2,100	N/A
Ford and Mercury Hybrids	Now through 9/30/07	Later
2007 Ford Escape 2WD	$2,600	N/A
2007 Ford Escape 4WD	$1,950	N/A
2007 Mercury Mariner 4WD	$1,950	N/A
2008 Ford Escape 2WD	$3,000	N/A
2008 Ford Escape 4WD	$2,200	N/A
2008 Mercury Mariner 2WD	$3,000	N/A
2008 Mercury Mariner 4WD	$2,200	N/A
Mazda Hybrids	Now through 9/30/07	Later
2008 Mazda Tribute 2WD	$3,000	N/A
2008 Mazda Tribute 4WD	$2,200	N/A
Chevy, GMC and Saturn Hybrids	Now through 9/30/07	Later
2007 Chevy Silverado Pickup 2WD	$250	N/A
2007 Chevy Silverado Pickup 4WD	$650	N/A
2007 GMC Sierra Pickup 2WD	$250	N/A
2007 GMC Sierra Pickup 4WD	$650	N/A
2007 Saturn Aura	$1,300	N/A
2007 Saturn Vue Green Line	$650	N/A
Nissan Hybrid	Now through 9/30/07	Later
2007 Nissan Altima	$2,350	N/A

Credits for Alternative-Fuel Vehicles

Qualified alternative-fuel vehicles must run on compressed or liquefied natural gas, liquefied petroleum gas, hydrogen, or a liquid that is at least 85% methanol. Reduced credits are allowed for mixed-fuel vehicles that run on a mixture of an alternative fuel and a petroleum-based fuel. The maximum credit for garden-variety autos and light trucks is $4,000. These credits will also fade into oblivion after 2010 unless Congress extends them.

Credits for Fuel-Cell Vehicles

Qualified fuel-cell vehicles include, for example, cars that run on hydrogen cells. The maximum credit for these types of vehicles can be as high as $12,000. But it won't last forever. Unless Congress extends it, the credit will vaporize after 2014.

Credits for Lean-Burn Technology Vehicles

Cars and trucks that use lean-burn technology and qualify for tax credits have internal combustion engines that use a direct injection of a fuel mix with a higher-than-normal percentage of air. Some new diesel cars that will soon be introduced in the U.S. may qualify. We'll have to wait and see, however, since ultra-strict emission-control standards must be met to qualify for this credit.

Bad News for AMT Victims

One last need-to-know fact: You will be stiffed out of all or part of your rightful vehicle tax credit if you get hooked by the dreaded alternative minimum tax (AMT) for the year you buy the vehicle. Why? Because none of the credits explained in this article can be used to reduce an individual taxpayer's federal income tax bill below his or her AMT liability amount (reduced by certain other credits). If this ticks you off (and it should), write your Congressperson to demand the repeal of the AMT.

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