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Bankrate's 2010 Tax Guide
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Tax breaks for gas savers

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Once a manufacturer sells 60,000 hybrids, credits on all of its qualified vehicles will be gradually reduced and eventually eliminated.

Full credits for the company's cars will remain in effect for the next calendar quarter following the quarter in which its 60,000th vehicle is sold. For the subsequent two quarters, the incentive will be 50 percent of the full amount. For the two quarters after that, it will be 25 percent of the full amount.

After four quarters -- one year -- of reduced credits, the buyers of that automaker's energy-efficient vehicles will get no tax credit.

Essentially, makers of popular models will see the tax appeal of those autos dwindle and disappear long before the credit's scheduled Dec. 31, 2010, expiration date. That's the case for Toyota and Honda. Because the Japanese automakers sold so many hybrids, buyers of their fuel-efficient vehicles can no longer claim a credit for the purchase.

The only domestic auto maker to face phaseouts is Ford. Through March 31, the credit on its eligible hybrids is just 25 percent of the full amount. For vehicles purchased on or after April 1, buyers will get no tax credit.

Necessary documentation

When you buy an eligible vehicle, the dealership should provide certification material that includes the maximum tax credit you can claim. In addition, the IRS issues announcements when vehicles meet the credit requirements and the credit amounts.

You'll need that amount, along with the date of purchase, to complete Form 8910, Alternative Motor Vehicle Credit.

The form is used by both individual and business owners of qualified vehicles. Part one of the form is filled out by both, part two applies to any business use of the vehicle, and part three deals with the auto's personal usage.

Be sure you follow line 3 instructions: Enter the maximum credit available for your particular vehicle. If you purchased a Toyota after its credit amount was reduced and enter that lower amount here, you'll cheat yourself. The reduced credit is taken care of on the next line, which asks for the percentage that the maximum is cut.

Some write-off restrictions

The tax credit also has a few other limits.

When you purchased and, in the IRS' words, put the vehicle into service affect the amount of credit and in which tax year it can be claimed.

You can only claim the credit if you bought the auto. It's not available for leased vehicles, regardless of how energy efficient they are.

You also must be the vehicle's original purchaser. A pre-owned Prius may still save the ozone layer, but it won't save you any tax money.

The alternative-vehicle credit is nonrefundable. This means it can zero out your tax liability, but it won't help produce a tax refund for you. You also must count several other credits you claimed -- such as the foreign tax, child and dependent care, elderly and disabled, education, retirement savings, residential energy, and child tax credits -- before you can take the fuel-efficient vehicle break.

For example, say you owe the IRS $500. You bought a hybrid worth a $1,000 credit. Because you can only use the alternative vehicle credit to eliminate your tax bill, you effectively lose the excess $500.

Finally, the alternative motor vehicle credit doesn't apply to the alternative minimum tax. If you owe the IRS more money under that costly parallel tax system, you cannot use the automotive credit to reduce it. You can claim the alternative motor vehicle tax break only if your regular tax liability is greater than your AMT bill.

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