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Popular hybrid credits gone, but others remain
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In June 2006, Toyota sold its 60,000th hybrid. That included not only the Prius, coveted by celebrities and not-so-famous drivers alike, but also versions of the automaker's Camry, Highlander and luxury Lexus models.

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In total, 13 Toyota/Lexus hybrids were credit-certified. And under the credit guidelines, the tax break phased out for all of those vehicles, not just the popular Prius.

In effect, earlier buyers of hybrids tend to receive the greater tax rewards. That's particularly true once a manufacturer hits the 60,000 sales mark. The longer you wait, the more your credit is reduced, until it disappears entirely.

This table shows what various buyers of a Prius, which had an original credit of $3,150, faced as they bought their particular autos at different times.

Tax credit events and deadlines for Toyota Prius buyers
DateEventAvailable credit
Jan. 1, 2006Tax credit becomes available for Prius hybrids purchased on and after this date -- through Dec. 31, 2010.$3,150
June 2006Toyota sells a total of 60,000 hybrids -- all models.$3,150
July 1, 2006 through Sept. 30, 2006 (first quarter after sales target reached) Prius purchased during this period are still eligible for full credit. $3,150
Oct. 1, 2006 through March 31, 2007 (second and third quarters after sales target reached) Prius purchased during this period are eligible for 50 percent of original credit. $1,575
April 1, 2007 through Sept. 30, 2007 (fourth and fifth quarters after sales target reached) Prius purchased during this period are eligible for 25 percent of original credit. $787.50
Oct. 1, 2007 and beyondNo tax credit allowed for Prius purchases.$0

And while the table uses the Prius' dollar amounts, the percentage limits apply to all Toyota or Lexus hybrids bought during the five post-60,000-sales quarters. (In other words, dollar amounts vary with the model.)

Now Honda buyers will have to do similar phaseout math on their 2008 returns for any purchase made last year.

Some things are constant
Although the various credit amounts are different for each make and model and change depending on overall manufacturer sales, there are a couple of constants when it comes to the alternative fuel/hybrid vehicle credit.

First, pay attention to dates -- both when you buy the hybrid and when you actually take possession of it. When there was a rush a couple of years ago to get the full credit on a Prius, the "placed in service" requirement was interpreted as the date the buyer took actual possession of the hybrid. However, the IRS subsequently clarified the legislative language and issued guidance that the credit amount would apply as of the date of purchase. The placed-in-service date, however, remains applicable as to which year's tax return the credit can be claimed.

For example, if you bought a full-credit Honda on Dec. 31, 2007, and drove it off the lot that day, you would have claimed the credit on your 2007 tax return. If you bought the vehicle in December 2007 but didn't take possession until February 2008, you would claim the full credit for 2008, the year in which the vehicle was placed in service.

Similarly, if you bought a Honda on June 30, 2008, that would entitle you to half the original credit amount on your 2008 tax return, even it you didn't pick up the vehicle from the dealer until mid-July last year, when the credit had been cut yet again.

Secondly, the only taxpayer who can claim the credit is the vehicle's original owner. And the qualifying auto must be new; the credit does not apply to a used hybrid.

Finally, while the credit can help you reduce your tax bill, it has its limits. It is a nonrefundable credit and its name means just that. It can help you zero out your tax bill, but it won't get you a check from Uncle Sam.

 
 
Next: "Gas prices have a greater impact than the tax credit."
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Alternative fuels: Help's coming
Hybrid tax deduction now a tax credit
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