Popular hybrid credits gone, but others remain
By Kay Bell • Bankrate.com

After reaching historic highs in the summer of 2008, gasoline prices have settled in at at just under $2 a gallon. But many motorists don't believe prices will stay that low for long. Those folks are looking to trade in their gas guzzlers for models that are much friendlier to the environment and, if gas prices climb again, their bank accounts.

Unfortunately, though, there is no longer any tax value in buying the most popular hybrid vehicles. Provisions in the law that created the credit for buyers of fuel-efficient vehicles mean that manufacturers -- and their customers -- must pay a tax price for being the favorites.

In 2007, Toyota became the first car maker to face the tax credit phaseouts, which are mandated when an automaker sells a certain number of its gas-saving vehicles. The sales of the Prius model alone quickly pushed the Japanese carmaker into the no-credit zone.

Honda hybrids were hot on Toyota's heels. The credit for that manufacturer's energy-saving autos began was reduced in 2008, and this Jan. 1, 2009, tax credits for purchases of Honda hybrids also disappeared.

Counterintuitive calculations
Essentially, the most popular hybrids, which usually are the most fuel-efficient, lost their associated tax break more quickly than poorer-selling makes and models. The Energy Policy Act of 2005, which established a new tax credit system to reward purchasers of IRS-approved hybrids, mandated the tax benefit's reduction once a carmaker sells its 60,000th hybrid.

It seems counterintuitive, but Congress included the legislative limit to help out American automakers, who are substantially behind their Japanese counterparts when it comes to hybrid technology. The hope was that once the credit is gone, energy- and tax-conscious drivers would opt for other models that are less efficient, but still afford some tax savings.

Toyota hit the 60,000 sales mark in June 2006 and the phaseout schedule meant the end of the credit for any of its hybrid vehicles, including those bearing its luxury Lexus nameplate, on Oct. 1, 2007. Before it was eliminated, buyers could claim a reduced credit on their tax returns depending on when they bought the vehicle.

Honda purchasers started dealing with similar reduced-credit calculations at the beginning of 2008. When that year began, all Honda hybrid credits were cut in half for purchases made in the subsequent six months. Then, the credit amounts were reduced again to 25 percent of each Honda hybrid's original amount for six months. Finally, on Jan 1, 2009, buyers of a Honda hybrid weren't able to claim any tax credit for their new car.

The dates and credit amounts are confusing, especially since they are applied to each automaker separately. And that's just one of several components of the rather convoluted law.

But if you bought one of the autos, you need to make note of them because they determine your tax break when you file your 2008 return. Individuals who amend a previous filing to claim the credit also need to know their precise hybrid purchase date to make those changes.

Below are the basics hybrid car shoppers should know.

Tax credit for autos:

• First, there is no set tax credit amount. Precisely how much you can subtract from your final IRS bill depends on which eligible vehicle you buy. So careful car shoppers now must take into account not only miles per gallon and price, but also each auto's varying tax break. • Second, the list of IRS-certified vehicles is not fixed. As automakers produce qualified hybrids, they will be added to the roll, meaning consumers could be comparison shopping without all the possible data. Five additional Toyota/Lexus models, for example, were approved just days before that automaker's credit was reduced on Oct. 1, 2006. • Finally, the hybrid credit amount will be incrementally reduced and ultimately eliminated. That's not unusual when it comes to tax laws, but in this case the reduction schedule is particularly vexing because the law didn't set one specific date on which the credit cuts will begin. Instead, the phaseout dates will be determined on a manufacturer-by-manufacturer basis, tied to each automaker's individual hybrid sales.

That forces the car companies and their customers into a bit of a guessing game. They have to keep their eyes on sales reports and calendars, as well as on the IRS's "OK" list, to make sure they get the biggest possible tax break or don't lose the tax savings entirely.

Eligible hybrid vehicles by manufacturer:
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60,000 and counting down
The credit countdown starts when a manufacturer sells 60,000 of the fuel-efficient vehicles. The tax break then is reduced over five subsequent calendar quarters after that 60,001st hybrid hits the road.

So although the credit technically is available through 2010, Toyota and Honda can no longer tout the tax benefit when marketing its vehicles.

Meanwhile, other automakers whose hybrids aren't as hot could conceivably use the tax credit as a sales promotion all the way up to Jan. 1, 2011.

In essence, the most popular hybrid models, which also provide the most tax savings, have the shortest credit life.

Paying for popularity
The credit-cut clock started ticking in June 2006 for Toyota, the acknowledged leader, primarily due to the popularity of its Prius model.