• E-mail
• Print
• Comment
• Font Size
• Digg
• del.icio.us
• Discuss article

Detroit Free Press Susan Tompor Column: Tax Credit for Hybrid Cars is Confusing

Posted on: Monday, 16 January 2006, 06:00 CST

By Susan Tompor, Detroit Free Press

Jan. 16--Drivers who buy a new hybrid car or truck in 2006 might get an even better tax break. But be prepared for one tax-cutting headache.

A new tax credit for hybrids and other fuel-efficient vehicles took effect Jan. 1.

What's the credit? Well, the dollar amount depends on the model of the hybrid car or truck. And it could depend on how popular the hybrid is and when you plan to buy it.

Talk about one doozy of a tax mess.

Going green

This new tax credit was part of the energy bill signed into law last summer. The idea is to encourage the purchase of environmentally friendly or "green" vehicles.

The new rules are different from the old tax breaks for gasoline-electric vehicles.

"It was a little simpler for the consumer before," said Jack Nerad, executive editorial director for Kelley Blue Book.

The old rules: If you bought a new hybrid and put it on the road in 2005, for example, you'd be covered by a tax deduction of up to $2,000. The hybrid vehicles must be certified as such by the Internal Revenue Service. Those taxpayers who qualify could still file for this deduction on the 2005 return.

The new rules: If you buy a new hybrid and put it on the road in 2006, you could be covered by a tax credit, not a deduction.

One thing remains the same: You must buy, not lease, the hybrid to get the tax breaks.

Credit is better

A tax credit, in general, is a better tax break than a deduction. A tax credit reduces the tax owed on a dollar-for-dollar basis; a deduction reduces the amount of income that's taxable.

So a $2,000 tax credit saves someone $2,000 on his or her tax return. But a $2,000 deduction would offer up to $700 in tax savings, depending on an individual's tax bracket.

But things with this tax credit aren't simple. This new hybrid tax credit will be calculated based on two components.

One is based on the model's rated fuel economy, compared with a standard 2002 model. The other part of the credit is called a conservation credit or based on the model's estimated lifetime fuel savings.

Consumers must do more legwork to understand what kind of tax savings they might get if they're buying a specific hybrid car or truck.

On Friday, the U.S. Treasury issued guidelines on the credit. But don't expect to see a list of what cars get what credits when you go to the U.S. Treasury Web site at www.ustreas.gov.

Instead, you'll get complicated guidelines that can be used by the carmakers to help determine the tax credits on their vehicles. The maximum credit is up to $3,400.

You're going to need to talk to your car dealer, your tax preparer and possibly do some research on the Web in advance to understand this one.

Ford Motor Co., for example, has estimated that buyers of the Ford Escape Hybrid and the Mercury Mariner Hybrid would be eligible for a credit of $2,600 for a two-wheel-drive version. Ford estimates that the credit would drop to $1,950 for the four-wheel-drive models.

Honda Motor Co. estimated that its Honda Civic Hybrid would get a $2,100 tax credit. Buyers of the Honda Insight Automatic are expected to get a $1,450 tax credit. And buyers of a Honda Accord Hybrid are expected to qualify for a $650 tax credit.

But buyers of a Honda Insight with a manual transmission would not qualify for any tax credit, said Edward B. Cohen, vice president of government and industry relations for Honda North America in Washington, D.C. The hybrid model uses an older technology and doesn't meet the energy standards set for this credit.

Consumers also can consult a list of tax credit estimates released by the American Council for an Energy-Efficient Economy. The Web site is www.aceee.org. Click on Energy Policy. And look for the estimates of light-duty vehicle tax credits.

The Toyota Prius, according to that Web site, would have an estimated tax credit of $3,150.

The Web site estimates that a hybrid version of the Toyota Camry, scheduled to be out in mid-2006, would have a tax credit of $1,300.

As consumers go through this latest tax maze, they need to know another twist.

Only the first 60,000 hybrids sold per carmaker -- and the clock starts in 2006 -- will qualify for the full credit. After that, buyers would get a smaller credit and ultimately the credits would vanish for that automaker.

The 60,000-mark doesn't mean much yet to some manufacturers.

Honda's Cohen estimates that the 60,000-threshold won't apply to Honda in 2006.

But pay attention if you're looking at a Toyota or Lexus hybrid this year or next year.

Cindy Knight, a spokeswoman for Toyota Motor Sales in Torrance, Calif., said Toyota estimates that 60,000 of these vehicles could be sold by the third quarter of 2006.

Toyota -- a leader in hybrids -- sold 146,560 hybrids in the United States in 2005, according to Knight. Those sales involved three models -- the Toyota Prius, the Toyota Highlander Hybrid and the Lexus RX 400h.

Much, much more is likely to be said about this new tax credit in the year ahead, especially since it can't be taken until taxpayers file their returns in 2007 anyway.

Contact SUSAN TOMPOR at 313-222-8876 or stompor@freepress.com.

-----

Copyright (c) 2006, Detroit Free Press

Distributed by Knight Ridder/Tribune Business News.

For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail reprints@krtinfo.com.

NYSE:F, NYSE:HMC,

Source: Detroit Free Press

More News in this Category