Tax Credit/Deduction?

If you're referring to the fact that the 2006 Civic Hybrid (oor any of the 2006 hybrids) are not listed as qualified for tax deduction, then just wait. The IRS usually updates the list later in the year, and should most likely include all of the new hybrids sold in 2006. You can always contact the IRS for explicit, written confirmation. Otherwise, just hold off on filing your taxes until they update their list of qualifying hybrids.

"you will have to settle for the 2005 tax deduction"

For many folks, the 2005 tax deduction was BETTER than the new 3k tax credit.

I was advised that we would have had a larger relative reduction in taxable income if we had bought in 2005 because any car business deductions, and our AMT tax bracket, will negate all of the 2006 tax credit.

Whereas we could have applied the 2005 tax deduction.

So, check with your CPA or tax attorney.
[and feel free to tell me if your CPA says I received bad tax advice, with so many CPA's getting sued for malpractice and/or shut down by the IRS...]

So, with that information about 2006 in mind and since I just purchased a 2006 Escape this month it looks like I would be wise to stop my extra with holding this year.

Todd, can you clarify? Getting a tax refund doesn't mean someone is in a higher income bracket or not in a higher income bracket - unless greater than $25k of taxable income is what you consider to be a higher income bracket. Getting a tax refund is dependent on how much taxes were withheld from your paycheck versus how much you owe. Same concept applies with tax due - most people will have tax due.

For MOST people, I have a hard time seeing how a $2k deduction is better than than a $3k tax credit. A $2k deduction results in a $200-$600 difference in tax owed (dependent on your tax rate) versus a $3k reduction in tax owed.

If anything, I see that a credit is worse for businesses that claim a total loss so that their tax owed for the year is, let's say, zero. Since their tax owed is zero, there's nothing for the credit to offset.

Again, the exception is for people where the taxable income is less than $25k (give or take) since the tax owed then would be less than the tax credit.

There is a better explanation of what I have been trying to pass along right here at hybridcars.com and the link is: http://www.hybridcars.com/tax-deductions-credits.html

Hope this helps.

Found one more item by the same author, http://taxes.about.com/od/deductionscredits/a/hybridtaxcredit_2.htm, where this tax credit won't help (much) if you are subject to AMT. Sounds like this credit won't help the high-income filers as much.

a tax credit is a credit towards your tax liability for the year, regardless of refund or tax owed later. but if you didn't have a tax liability may be you will not be able to get it. there are credits that can translate to refunds even if you have no tax liability. EIC is one of them. low income people get cashback from IRS even if they paid zero tax for the whole year. if they did pay tax on their income, not only they will get all the tax back, they will also get EIC money. IRS robs the riches to give to the poor. but I don't think this hybrid cedit is refundable if you have no tax liability. to IRS, if you can afford a hybrid, you are not poor.

for most people that buy cars, they have jobs and have a large tax liability. that credit would just lower that liability. if that translates to a refund, great. if that lowers your tax owed, better. either way it's the same amount of money for you, that IRS took away in every pay check as estimated advance monthly payments towards your actual tax liability. at the end of the year, you then will be able to calculate the exact tax liability and balance it with IRS.

whether you get a refund or tax owed depends on also your W4 "# of of exemptions". you can put in more to get more "money" in every paycheck, but you will likely need pay back at the end of the year to IRS. best is to adjust that number to get it about right.

Now guys, don't rip on the CPA if I did a poor job of translating. The bottom line is your tax liability and the Hybrid Tax Credit is the LAST item taken to reduce your tax liability. If you are already getting refund without the Hybrid Tax Credit, then you are most likely (not all cases) not going to benefit from the Hybrid Tax Credit. An example would be my neighbor. He has several children, mortgage interest, medical and a few other deductions. His filing for 2005 showed that he had no taxable income (although he made $52k) and this showed him with zero tax liability, which makes a Hybrid Tax Credit useless to him. He could not have used the Hybrid Tax Credit to INCREASE his refund, because he has no tax liability. In my case I had a tax liabilty of $3900.00 and although I received a refund the Tax Credit would have been useful.

I apologize if I explained it very poorly. Simply put, if you have NO tax liability you can not use the Hybrid Tax Credit to get additional refund dollars.

ATTENTION ON AMT.

The previous AMT comments are incorrect.

The "alternative minimum tax" (AMT) impacts deductions -- not tax credits!

Tax credits are subtracted from line 46 (1040), *AFTER* the AMT (line 45 1040) is computed and added to your tax liability (line 44 1040).

This previously cited article [http://taxes.about.com/od/deductionscredits/a/hybridtaxcredit_2.htm] is extremely misleading. Read it very precisely and look at the 1040!!!!
More importantly, buy a hybrid -- I'm ordering a Civic tomorrow.

Article looks correct still.

"maximum hybrid tax credit" =
"Regular income tax liability
minus the total of these other tax credits
minus the *tentative* minimum tax calculated under the AMT rules."

Let's say regular income tax liability is 10k and to make it easy the total of other tax credits is 0. Now if the *tentative* minimum tax (not the AMT that is added in the 1040) is 8k, then 10k - 8k leaves 2k meaning that the maximum hybrid credit is 2k. If the *tentative* minimum tax is 12k, then 10k - 12k leaves 0 so the maximum hybrid credit is 0.

And anytime the impact is to the tax liability, it's a credit whereas impact to taxable income is a deduction. This hybrid credit is a credit and not a deduction.

I know what you are getting at and I had the same question.

I haven't seen the IRS issue any detailed guidelines other than to say "(2) the rule preventing the credits from being used to reduce alternative minimum tax liability;" at http://www.irs.gov/irb/2006-06_IRB/ar11.html.

However, the tax bill (which is what the IRS uses to create their instructions) does cover it but it's not easy reading. At http://www.taxalmanac.org/index.php/Sec._30B._Alternative_motor_vehicle_credit, Search for (g) Application With Other Credits then (2) PERSONAL CREDIT

(2) PERSONAL CREDIT- The credit allowed under subsection (a) (after the application of paragraph (1)) for any taxable year shall not exceed the excess (if any) of--
(A) the regular tax reduced by the sum of the credits allowable under subpart A and sections 27 and 30, over
(B) the tentative minimum tax for the taxable year.

This is America....free competition...why do hybrids
get a taxincentive (read refund from other taxpayers)
suvs gets excemption from compliance to pollution
controls and also excemption from gas guzzler tax!!
Poor guy in a fuel efficient Civic cant drive in the
HOV lane while a fuel wasting hybrid-suv can!!!
Oh that really make sense.

Regarding the first question about a 2006 Honda Civic Hybrid bought in 2005. Yes, those of us in that situation are NOT eligible for ANY tax credit. I just got off the phone with the IRS. I'm pretty upset about this as we would have been eligible if we had bought a 2005 model in 2005 or a 2006 model in 2006. I know it won't change anything, but I think I'll be writing a letter to my state's congressional representative -- it just seems like such an oversight. I'm also pretty upset at at the dealership as I specifically inquired about the tax credit on the 2006 Honda Hybrid Civic. Of course, I know that's not their area of expertise and they were just trying to make a sale. As the saying goes, "buyer beware."

I am expecting delivery on a '06 Prius any moment. The dealership has not been at all helpful in helping to understand how this tax credit works, and in fact I was told that I could file for it before the next tax cycle and get money (Yes, actual cahs) back. That seemed fantastical, but I know little about the difference between credits and other incentives (although I get deductions, et all).

So, my question: This is obviously not true given the talk on this board, correct?

Thanks,
Nicole in Michigan

There was a lot of publicity in newspapers about this hybrid car credit. We bought a 2006 Ford Escape hybrid in March of 2006 with the full expectation that, as we had read in several articles in the newspaper (Philadelphia Inquirer) and magazines, that as long as the 2006 model was purchased after 1/1/06 and before 3/31/06, we would be eligible to take the hybrid credit on our 2005 return.

That turns out not to be the case.

It looks as if this thing is so new that the stories got all out of wack. I'm going to file an extension and take this whole mess to an accountant (was just going to do it myself before this) for fear of losing the credit if we wait til next year.

Right--I'm understanding that from reading this page. But all the articles we read about the credit seemed to say that you could and should file for the credit with your 2005 taxes if you bought the car in the 1st 3 months of 2006.

Now I see that there was a deduction for 2005 that expired 12/31/05 and a new credit for 2006. The stories I read seemed to confuse the two, and made it sound as if you would miss out on the credit entirely if you didn't put in for it with your 2005 taxes--or maybe we just misunderstood what we read.

Thanks.

See the Mar 16 statement by Bruce as to how the hybrid credit is treated a little differently than the normal credits