Hybrid Cars and The Tax Breaks You May Receive

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Hybrid Cars and The Tax Breaks You May Receive

With gas prices going up and up and up, and the new "cheap" price for gas hovering around the $2.00 per gallon mark, hybrid cars have been getting a lot of attention. Hybrid cars were previously only discussed in environmentally active circle, but now that gas prices are hitting everyone where it hurts - the wallet - demand for the cars has reached a fear pitch. But aside from the environmental benefits of driving a hybrid car, and the savings on your gas bill, you now have a new reason to get excited about these efficient little autos. Buying a hybrid car can save you big bucks on your tax bill.

Tax breaks for purchasers of hybrid cars are nothing new. The government has been giving tax breaks in one shape or another to hybrid drivers since 2004. It is the tax incentives that came into effect on January 1, 2006, that really made a huge difference to drivers, though. The tax credits vary widely depending on the model of hybrid car purchased, but you can expect a credit ranging anywhere from $350 for the upcoming 2007 Chevrolet Silverado or Sierra hybrid to $3,150 for a Toyota Prius. Tax incentives like these, which can make a significant impact on your tax bill, have sent drivers flocking to hybrid models.

There are some restrictions that come along with these tax breaks. They can only be applied to cars purchased on or after December 31, 2005; hybrid cars purchase in 2004 and up until December 30, 2005, are still eligible for the old tax credits. These incentives only apply to people who purchase new hybrid cars; used cars do not qualify for a tax break. In some circumstances, hybrid owners who sell their cars may have to reimburse the IRS for the tax credit they received. The tax breaks only apply to people who own their cars. The tax credits for leased cars may be claimed by the dealership, in some circumstances. The hybrid car must be used for driving within the United States.

These tax breaks won't last forever. They are only good for the first 60,000 cars sold of any particular model. While it may be awhile before this caveat affects Honda, Lexus, or Mercury hybrids, Toyota hybrids have already passed that 60,000 mark. As of October 2006, Toyota hybrid drivers are only eligible for 50% of the original tax credit. Eventually, that number will fall to 25%. Other hybrid models will be hit with a similar sliding scale when they sell 60,000 units.

Additionally, the tax credit bill has a time limit as well. These tax breaks will expire in December 2010, at which point lawmakers will have to either scrap or renew the bill.

This information about tax credits for hybrid cars is general; you should always consult a financial advisor to understand the exact nature of the rules, as they apply to you. If you are taxed under the Alternative Minimum Tax scheme, you will be unable to claim any deductions for a hybrid car. If you are someone who receives a lot of tax credits, for things such as childcare or retirement savings, then the hybrid tax credit comes last on the list. If you are left with an outstanding tax bill after your other reductions, your hybrid tax credit cannot be more than the amount that you owe; if you owe $200 after your other deductions, you will only receive $200 for your hybrid credit, even if you technically could have received more. For these reasons, always get professional advice before wading into the world of tax credits.