 Planning for the hybrid tax credit
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 Dear
Tax Talk,
Early this year we bought a Prius, which has a significant tax credit of $3,150. At that time I tried to find out from
IRS if I could adjust my withholding to take this into account. They had not the foggiest.
I wrote my senator outlining my problem. Four months later we both got replies that I could not do so. I
also asked for information on how this will be handled as we do our own taxes on one of our computers. I got back 40
pages on how businesses take this credit for tax year 2005, not 2006.
Only two pages relate to this. It cost over a dollar to mail, when tearing out two pages would have taken
one stamp. I presume the senator's office got the same information at similar cost.
I presume that this structure will be in the new 1040 instructions for calendar year 2006.
Since they were not particularly helpful, I am probably
going to move significant amounts from IRA to Roth to swallow this
refund. Two can play this game, and I object to interest-free loans
to the IRS/Treasury.
Since Toyota has already sold over 60,000 hybrids and will lose the biggest credit Oct. 1, I would expect
a lot of others will have to cope with this problem. And more important, if sales hold up, the total covered vehicles
might well be way over 100,000. That is not chicken feed in my book. Say $300 million credit.
I love saving gas. It might not make economic sense
today, but each gallon I save is in the bank (or well) for later
shortages.
-- Duke
 Dear
Duke,
The rest of the gas-guzzling world appreciates your efforts, and
you will be well-rewarded with a significant tax break, as well
as savings at the pump. I recently got my first ride in a Prius
in Geneva. It was a taxicab, and I was surprised how roomy it was
inside. The car actually looks smaller in the United States. The
driver loved it, especially considering a gallon of gas is around
$7 in Switzerland.
I am not sure why the Internal Revenue Service wouldn't
be able to tell you about reducing your withholding. Since the credit
is similar to additional income tax withholdings, you can reduce
the taxes taken from your paycheck to avoid giving the IRS an interest-free
loan.
Alternatively, if you're moving money from a traditional
IRA to a Roth, the income tax on this transfer can be offset with
the hybrid car tax credit. However, be aware that the credit does
not apply to your alternative minimum tax. If you have large state
and local taxes, miscellaneous itemized deductions, or other tax-preference
items, you can be thrown into the AMT and the credit won't steer
you out of there. Drive carefully!
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