Tax Tip of the Week
June 26, 2006

That’s because the tax credit you’ll receive for buying a hybrid phases out after each manufacturer sells a certain number of vehicles. Based on recent sales figures, the tax credit for at least one popular model could be cut in half later this year.

With rising gas prices, hybrid cars have become popular. Hybrids have both an electric motor and a small gasoline engine. Their battery is recharged by the gas engine and by energy captured when braking. As a result, they achieve better gas mileage than a regular automobile.

If you buy a new hybrid car, you’re eligible for a tax credit. A credit directly offsets taxes you owe, dollar for dollar. In recent months, the IRS has approved the certification of various makes and models of hybrid vehicles, with credits ranging from $650 to $3,150.

But Congress put a limit on the total tax credits available for each manufacturer. Once a company sells 60,000 hybrids, the full credit is available for only one more calendar quarter. After that, the credit amount for that manufacturer’s cars reduces to 50% for the next two quarters, then to 25%, and eventually to zero.

For example, based on recent sales, Toyota/Lexus could reach the 60,000 limit before midyear. If that happens, you would receive only 50% or less of the approved credit if you buy one of their vehicles after September 30th this year.

Similar reductions will apply to other manufacturers after they hit their sales limits. That’s why buying sooner rather than later could be a smart tax move.

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