This means, effective January 1, 2006, taxpayers who took delivery of hybrid vehicles on or after that date will enjoy greater tax relief than before. As you may know, hybrid vehicles purchased in the past have allowed their owners a $2,000 deduction from their taxable income; now, that deduction is replaced by a hybrid tax credit, which is applied to the owner's federal tax liability. The difference can be very significant [1].
While an individual's income tax liability can be subject to a number of factors, it's wise to consult a tax or accounting professional when claiming a deduction or credit on one's income tax return.
Here are answers to the most popular questions being asked about this change in tax benefits:
My new Prius arrived in late December, and I took delivery just before year's end. What will my tax entitlement be?
You likely will be entitled to the $2,000 deduction in the amount of your taxable income for the year 2005. Additionally, some states have hybrid vehicle tax incentives. There will be no benefit to your federal tax obligation for the year 2006.
What do I have to do to qualify for a tax credit in 2006?
First, you must have taken delivery on or after January 1, 2006. The hybrid vehicle must be purchased new, not leased, and it must meet certain Federal Emissions Ratings and be capable of moving under electric power alone. All Toyota and Lexus hybrids meet both of these requirements.
In addition, you should know that your benefit may be substantially reduced or eliminated if you are subject to the Alternative Minimum Tax, commonly known as AMT.
How much is the tax credit for a hybrid that I buy in 2006?
That depends on the vehicle you selected and on when you took delivery of it.
To arrive at a credit amount, the government calculates the percentage improvement in fuel economy as compared with the EPA average for its weight class vehicle in 2002. That results in a Fuel Economy Credit amount. Then, the vehicle's estimated lifetime fuel savings is compared with the EPA 2002 average for its weight class, resulting in a Conservation Credit amount. The sum of those two forms the total credit.
Toyota has requested IRS approval of an estimated credit amount for Prius of $3,150 (MY06 and MY05) and for Highlander Hybrid of $2,600 (4WD-i and 2WD); however, the IRS has not yet approved these estimates. Prior to final IRS approval, the actual amount of the credit available for the purchase of each vehicle is subject to further change without notice. These amounts should be considered only as estimates of the final credit amounts.
It's important to know that the amount of your tax credit may depend on how many hybrids the manufacturer has delivered in a certain period. The full incentive is good through the calendar quarter following the quarter in which the manufacturer hits sales of 60,000 hybrid units. The incentive is then reduced by one-half for the next six months; by another one-half for the next six months; and then phased out completely.
Are you saying that the full tax credit is limited to only the first 60,000 hybrid buyers?
No, this does not mean that only 60,000 Toyota hybrid buyers will get 100 percent of the credit. There will certainly be more. For example, if the 60,000 sales mark is hit in May of this year, then people who buy for the remainder of that calendar quarter (i.e., through June 30, in this case) and the following quarter (July through September) also get 100 percent of the credit. In the two subsequent two-quarter periods, there is no limit to the number of buyers who can respectively claim 50 percent and 25 percent of the credit. Finally, after the fifth quarter following the quarter of the 60,000th sale, the tax credit expires for that manufacturer.
How can a customer find out how many hybrids the company has sold as of a particular date?
Toyota will report total hybrid unit sales to its dealers, the media, and to the IRS as soon as possible after the close of each calendar quarter, as well as at year-end tax preparation time. The company also will post these totals regularly on Hybrid Synergy View as well as on Toyota's website -- www.Toyota.com.
[1] This summary does not constitute tax advice. All persons considering the use of this important new hybrid vehicle tax credit should consult with their own tax advisor to determine the specific amount of benefit, if any, that they may be able to claim on their federal income tax returns. Your tax advisor may also have further information on the many state and local tax incentives that may be available to Hybrid vehicle owners.
The above summary is based on the federal income tax law in effect in the fall, 2005, and may be changed, without notice, by later changes to the tax law or further action by the Internal Revenue Service.
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