Tax credit on buying a Prius in 2006

hybridcars.about.com/od/news/a/hybridtaxcredit_p.htm describes how the 60,000 unit limit works. More favorable for the buyer than I expected.

The key date for the credit from an IRS perspective is when the car was "placed into service". That would mean the day you start driving it, regardless of when it was manufactured or when the dealer paid for it. It would also mean you could purchase and take delivery of a 2006 in December of 2005 and not actually place it in service until 2006 and still qualify. However, if the IRS reviewed your purchase paperwork and saw it was purchased in 2005, you'dd face an uphill battle convincing them that it actually wasn't placed in service yet and was sitting in your garage the whole time.

See the Energy Policy Act of 2005
SEC. 1341. ALTERNATIVE MOTOR VEHICLE CREDIT.
There are many analyses available on the web.of this act, signed by the President on August 8, 2005.

The incentive depends on the fuel efficiency of the vehicle compared to a standard for its weight class, and it will phase out over the next two quarters after the manufacturer sells 60,000 hybrids, counting from January 2006.

Estimates put the tax credit at over $3,000 for a Prius and over $2,000 for a hybrid Honda Civic, and lower for the various hybrid SUVs.

If you miss out on a tax credit on a Toyota or Honda, other manufacturers are following on their heels.

I believe you can file an amended return. See: http://www.irs.gov/newsroom/article/0,,id=104549,00.html

What if you buy in 2006 and the manufacturer for the car you want has already sold 60000 vehicles? Then you get no tax break at all?

Here's a link to the Energy Policy Act of 2005, http://energy.senate.gov/public/_files/ConferenceReport0.pdf. The tax part about the credit phase out is on pages 1417 & 1418. The full tax credit is available for the quarter after the quarter in which 60,000 hybrid vehicles are sold. Half of the credit is available for two more quarters, and 25% of the credit is available for 2 quarters after that. Thus. the full tax credit is available at least through June 30, 2006 (assuming Toyota sells 60,000 by March 30, 2006 which seems unlikely). My guess is that the full tax credit will be available through September 30, 2006, and possibly through the end of 2006.

Happy New Year everyone! My husband and I had planned to replace his car back in September but waited 4 months to take advantage of the 2006 tax credit. As of yesterday we are the proud owners of (drumroll please) a Toyota Highlander Hybrid. Since we purchased in 2006, it will be next year before we file our 2006 taxes to claim the credit but I wonder if we are supposed to contact the IRS to register the fact that we purchased a vehicle (given that there is a limit) The Auto dealer had no idea and to make matters scarier...the IRS had no clue either. I would just hate to miss out on the credit due to the fact that I forgot to fill out some piece of paper somewhere...If anyone out there has more information, please let me know. thank you!

What about the timing? If I go to a dealer today and order a Prius, but it doesn't get delivered until January 2007, what is my purchase date - 2007 or 2006? I'm guessing it would be 2007, since that's when it would be "put into service" - is that right?

If I buy 2 prius in 2006, will I get 2 tax credits? I can't seem to find the answer.....

"in audits, the IRS generally wants to know you followed the spirit of the law, and is not as hung up on technicalities as most people believe."

IRS is very hung up on technicalities, like making sure folks followed the rules, or the credit will be disallowed. It's good hearted comments like yours that keep my law school associates who practice tax law in business :)

And keeping good records is more true now, that the deficit is at historic highs, than ever. In fact, folks may recall the announcement last year that to pay for the war, the IRS would be doing more audits of the middle class, because IRS research showed, middle class usually don't hire the expensive "enrolled agents" necessary to appeal IRS decisions in tax court, whereas the rich had been hiring attorneys that were beating the IRS on appeals in Tax Court in numbers sufficiently high, to cause the target of the new increased audits to be shifted to the middle class.

So, as hybrid tax rule "technicalities" are finally announced as to how to comply, I'd make sure you kept all required paperwork, or your credit will likely be disallowed, should you become one of the increasing middle class families the Republicans have announced they've increased IRS funding to audit [not because you've done anything wrong, but because you can't afford to hire enrolled agent tax attorneys to prove your innocence....]

In the audit, if one can not provide evidence of compliance to qualify for the credit or deduction, it is disallowed, and tax penalties can be accessed, if the disallowed credit or deduction results in an underpayment of taxes, and as audits occur years later, these penalties add up and can become stiff.

So, watch for hybrid credit rules finally to be announced, and I'd suggest folks cross every "t" and dot every "i" or your credit can be disallowed.

George I have to disagree with you. I have spoken to several people who have had IRS audits, and in EVERY SINGLE CASE the auditor was happy and satisfied with anything where the person being audited made a reasonable attempt to comply with the the law. That's not saying you shouldn't attempt to follow every law and regulation as fully as possible. Heck, even when you don't attempt to follow the law, the auditor is sometimes happy to negotiate a compromise and not simply stick you with the full amount owed. Certainly don't follow my advice, talk to your accountant, but that has been my experience.

Craig, you must work for the IRS :)

I'd suggest folks google the 1996 sworn testimony before Congress on IRS atrocities.

Or google news articles on the thousands of clients of CPA’s that have been targeted by the IRS, clients who not only complied with the spirit of the law, but also hired reputable CPA’s to comply with the letter. But, now entire tax firms, and hence its clients, have been targeted.

And now, innocent clients are forced to try to hire either Enrolled Agents, or those firms that advertise “we beat the IRS!” at $5,000+ retainers plus costs, only to be advised as most middle class taxpayers wrongly accused of tax underpayments of less than $10,000 will be – to pay the penalties and over pay taxes, because to prove innocence would cost more in legal fees than it costs to prove their CPA had correctly calculated their taxes.

Or call any Enrolled Agent and ask at what disputed amount they advise innocent clients that it is not worth to try fighting the IRS, just pay the wrongly assessed penalties, it’ll be cheaper.

Since being scared witless by the 1996 Congressional hearings on IRS atrocities, and subsequent news stories, and people I’ve known who at first tried to prove their CPA was right, I keep undeniable proof of every deduction, hybrid or otherwise, for what I’ve read since 1996 doesn’t point to the spirit of the law being sufficient, if the receipts don’t prove compliance.

See the "When does this incentive end?" section at
http://www.fueleconomy.gov/feg/tax_hybrid_new.shtml

"Beginning with the second calendar quarter after the calendar quarter in which the manufacturer sells 60,000 vehicles, the credit will be 50% of the full credit amount. This part of the phase-out will last for two calendar quarters.

For the next two calendar quarters, the credit will be 25% of the full credit amount. The incentives for vehicles by that manufacturer will end thereafter."

Basically the answer sounds like a no.

My girlfriend wants to buy a used Prius. Would a used hybrid get the tax credit? Or does that only apply to new cars?

I'm expecting a delivery of a new Prius before the end of April. Does anyone know how to find out if Toyota has sold 60,000 hybrid vehicles in the U.S. since January 1, 2006? I saw something in the news suggesting that this milestone has been reached or is about to be reached.

Question: If I bought a Toyota Prius, let's assume it qualifies for a tax credit of $3200. If I file my tax next year and end up having to pay $1200 tax prior to the tax credit, does that mean with the credit, I get a refund of $2000. How exactly does the credit work?

Quick summary of the tax credit deal if you aren't bothering to read about it... The tax credit for a Prius 2006 is $3150 NONREFUNDABLE tax credit. That means that if you are paying $4000 for taxes next year you can have it deducted to $850. But. if you are only paying $2000 then you will not get a refund, instead you can get a deduction to pay $0 in taxes In a way, it works like a coupon, where you can't redeem for cash but you get a discount. There are other ways to get refunds, just ask a tax pro. Hope this helps!

the credit will be fully available the first quarter after the quarter in which vehicle sales hit 60,000. so, if the toyota/lexus sales count reaches 60,000 in may, then until the end of next quarter (september) they will be able to claim the full credit

What is important is to look at how much you pay overall in taxes per year. Not whether your employer takes out more than you end up owing, leaving you with a refund. If you pay (not owe AFTER you complete your return and find out that you didn't pay enough over the year) at least $3150 (or whatever the exact figure of the rebate is) in federal income tax, you will have the full amount of the rebate credited back to you. That will result in EITHER lowering what you still owe the federal government due to underpayment during the year, or increase your refund if you overpaid each month.

If you didn't earn enough money to have owed/paid $3K in taxes, you won't get the full rebate.

What happens if I sell my Prius that I will be taking a tax credit on this year?

You may have owed $1500 in taxes but was that your total tax liability? I suspect not. Let's say your total tax liability (before the credit) for the year was $4000 but you had had $2500 deducted from your paycheck over the course of the year. In this case you would still owe the IRS $1500 when it came time to file. But if you got the Prius and qualified for the full credit, your total tax liability for the year would be $850 ($4000-3150), thus you would be entitled to a refund of $1650 ($2500-850) because you overpaid.

Losing the credit would only arise if your total tax liability for the year was $3000 and you qualified for the full Prius credit. In that case you would pay no taxes but you would lose $150 of the credit.

To any accountants out there!! Is this right?

Incidentally, just got my Prius yesterday. Paid $24000 for a Package 3 (not including taxes). Love at first sight!

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