Gasoline prices keep climbing, prompting many motorists to consider trading in their gas guzzlers for models that are much friendlier to the environment and their bank accounts. Unfortunately, tough, the tax value of the most popular hybrid vehicles keeps decreasing.
Provisions in the law that three years ago created a tax credit for purchasers 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 to face the tax credit phaseouts, which are mandated when an automaker sells a certain number of its gas-saving vehicles.
Last Jan. 1, Honda hybrids also became less tax-advantageous. The credit for that manufacturer's energy-saving autos was cut in half. And the tax write-offs for the various Honda hybrids drop again, this time to a quarter of their original amounts, on July 1.
Counterintuitive calculationsEssentially, the most popular hybrids, which usually are the most fuel-efficient, will lose 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 the year began, all Honda hybrid credits were cut in half for purchases made in the subsequent six moths. The credit amounts will be reduced again to 25 percent of each Honda hybrid's original amount for another six months until.
And on Jan 1, 2009, buyers of a Honda hybrid won'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 2007 return, which for taxpayers who got an enxtension could be as late Oct. 15. 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 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.
60,000 and counting downThe 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 can no longer tout the tax benefit when marketing its vehicles. Honda dealers will find out how that feels in January.
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 popularityThe credit-cut clock started ticking in June 2006 for Toyota, the acknowledged leader, primarily due to the popularity of its Prius model.