Cut emissions and your tax bill

Green could have a double meaning for environmentally conscious motorists at tax time.

Owners of the increasingly fashionable hybrids can write off $2,000 of the purchase price for these vehicles, which combine an electric motor with a gasoline-powered engine to produce fewer emissions. This should give the many Hollywood stars who own such environment-friendly autos slightly lower tax bills.

Of course, the tax break isn't limited to the rich and famous. Any driver who opts for an auto that the Internal Revenue Service has deemed eligible for the clean-burning-fuel tax deduction can write off some of the vehicle's cost. This includes not only the popular hybrid models, but also vehicles that operate on natural gas, liquified natural gas, liquified petroleum gas, hydrogen or any other fuel that's at least 85 percent alcohol.

And drivers of these various gas-saving vehicles got some more good news last fall. The write-off was scheduled to be scaled back to $1,500 in 2004, but provisions in a new tax law enacted last October postpone the phaseout until 2006. So if you bought a hybrid or any other clean-fuel vehicle last year, you can claim the full credit on your current return.

Most taxpayers eligible for this credit are hybrid owners. To help them know if their car is OK to claim, the IRS annually certifies hybrids that meet deduction standards.

This year, a domestic auto maker joins the list that has been dominated by Japanese manufacturers:

• Ford Escape Hybrid, model year 2005,
• Toyota Prius, model years 2001 through 2005,
• Honda Insight, model years 2000 through 2004, and
• Honda Civic Hybrid, model years 2003 and 2004.

Another nice thing about the tax break is that it's claimed directly on Form 1040. You do have to file that longest form, but there's no Schedule A to complete or income thresholds to meet. Simply enter the amount on line 35 of the 1040 and write "Clean Fuel" on the adjacent dotted line.

Some write-off restrictions
There are some limits, however. It's a one-time deduction, not one you can take each year for as long as you own the car.

Plus, only the car's original purchaser can claim the tax break. So while your pre-owned Prius may still save the ozone layer, it won't save you on your taxes.

Finally, you must take the deduction in the year you put it on the road. If you bought it after Jan. 1, then it won't do you any tax good until you claim the environmentally friendly car break on your 2005 return (due by April 15, 2006).

What if you were an eco-pioneer, buying a hybrid years ago, but you neglected to claim the deduction on the appropriate tax return? All may not be lost. You might be able to claim the deduction on an amended tax return.

Generally, you can file an amended return within three years of your original filing date, including extensions you were granted. So if you bought an eligible hybrid vehicle in 2001, but didn't claim it on the return you filed in 2002, check into whether refiguring that year's return could get you some tax money back.

Going greener to get a bigger tax break
Most clean-fuel eligible motorists will use the deduction because they drive hybrids. But owners of fully electric vehicles get an even better break: a tax credit up to $4,000.

The hybrid 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 will directly cut your tax bill, possibly even wiping out any taxes you owe.

To qualify for the credit, your 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 better tax break.

By filing Form 8834, a purchaser of an electric car can claim a credit of 10 percent of the auto's cost, up to a maximum of $4,000. Be sure to transfer the credit amount from that form to line 54 of your Form 1040, check box "c" and write in the form number.

Limited-time offer for cleaner driving
If you just don't have the cash now for a "green" car, you'll get more environmental write-off chances in coming tax years, but just a couple more years and at lower tax savings. Congressional action last October only postponed the phasing out of these automotive tax breaks.

The 2005 tax year is the last for the full $2,000 hybrid auto deduction. The tax break will drop to $500 in 2006 and disappear in 2007.

Electric auto owners will be eligible for the $4,000 tax credit again this year, but the break is only $1,000 in 2006. As with the clean-fuel deduction, the electric car credit is scheduled to end in 2007.

-- Posted: Feb. 15, 2005