Year-end auto moves that can trim taxes
By Kay Bell • Bankrate.com

If a Mercedes is on your Christmas list, cross it off. By waiting until the new year to buy, you'll save some tax money.

If, however, your next car purchase is environmentally motivated, get to the dealer this month to get a tax break along with your clean-fuel vehicle.

Patient buyers of high-end autos will find that when 2002 ends, so does the tax collected on sales of luxury cars. That'll give you a few extra dollars for the platinum hubcap upgrade or to spend on additional car washes.

This is the last of several federal taxes imposed more than a decade ago on extravagant items. Initially, the tax also was collected on expensive jewelry, furs, boats and aircraft. Those luxury taxes were repealed in 1993; the car tax remained but was gradually decreased.

In 2002, the tax is 3 percent of the amount of a car's price that exceeds $40,000. That would bump the total outlay for an $85,000 roadster up another $1,350.

If you just can't wait a few more weeks to head out on the highway in high style, then consider a previously owned Benz, Jaguar or Ferrari. The soon-to-expire tax applies only to new vehicles.

Deduction for "clean" driving
Looking for a less flamboyant vehicle? Then Uncle Sam may be able to help here, too.

The Internal Revenue Service offers two ways for owners of environmentally friendly autos to save. However, if you want to make your electric or hybrid vehicle pay off next April 15, you must act by Dec. 31.

The first way to shave a few dollars off your coming tax bill is through a $2,000 deduction you can claim for purchasing a new clean-fuel vehicle. These are autos that operate on natural gas, liquefied natural gas (LNG), liquefied petroleum gas (LPG), hydrogen or any other fuel that's at least 85 percent alcohol. The newly fashionable gasoline-electric hybrids, such as Toyota Prius, Honda Insight or Honda Civic Hybrid, also qualify here.

The nice thing about this deduction is that you don't have to itemize to take it. Simply enter the amount on line 34 of Form 1040 and write "Clean Fuel" on the adjacent dotted line.

If you just don't have the cash now for a "green" car, you'll get a few more environmental write-off chances in coming tax years. The $2,000 deduction will be available in 2003, and then it gradually decreases until it disappears in 2007 -- unless Congress extends it.

Going green to get tax green
Drivers of fully electric autos get an even better break: a tax credit up to $4,000.

The clean-fuel deduction allows you to reduce your taxable income, which generally produces a smaller tax bill when all the figuring is done. But with a tax credit, once you determine what you owe, the credit can reduce your tax bill further. In this case, it could even wipe out any due taxes.

To qualify for this credit, the new auto must run primarily on an electric motor powered by rechargeable batteries, fuel cells or other portable electric-current sources. The IRS cautions that hybrid vehicles, because they do not depend chiefly on electricity, are not eligible for this credit.

By filing Form 8834, a purchaser of an electric car in 2002 can claim a credit of 10 percent of the auto's cost, up to a maximum of $4,000. The same amount will be available for such autos bought next year, but the credit starts phasing out by $1,000 annually for tax years 2004 through 2006. As with the clean-fuel deduction, the electric car credit will end in 2007.

And what if you're an environmental activist with expensive tastes in the market for a car now? Martin Nissenbaum, director of personal income tax planning for Ernst & Young in New York, points out that this month offers an interesting juxtaposition of these auto tax laws.

The luxury tax threshold for electric vehicles, Nissenbaum notes, is $60,000 instead of the $40,000 for standard high-dollar cars. That would allow you to get the fancier electric model today without having to pay as much tax. And you'd still be eligible for the tax credit.

There's just one problem.

"I don't think Mercedes is making these yet," says the tax specialist.