Hybrid Tax Breaks Not for Everyone

Jan. 26, 2007: San Francisco Chronicle—Hybrid Tax Credit Bait and Switch

Summary: "If you are among the 150,000-plus proud purchasers of a hybrid gas-electric car during 2006, please sit down. I have bad news. Many of you will not receive the full tax credit that you expected.

To recap, in 2005, Congress passed an energy bill with numerous incentives to encourage conservation. One of these provisions provided a tax credit, beginning January 2006, for purchasers of approved hybrid gas-electric automobiles. This tax credit can be substantial — up to $3,150 for the Toyota Prius, perhaps the best known hybrid.

Unfortunately, unless you earn more than $750,000 a year, you can’t be sure you will qualify for the full published credit for your vehicle. This "gotcha" applies even if you bought the car well before October, when the tax credit for Toyota vehicles began to be reduced, per the 2005 law, because more than 60,000 Toyota hybrids had been sold."

This article shows why Congress should act now to fix the hybrid tax credit (as well as indexing the alternative minimum tax to inflation). While they’re tinkering with it, lawmakers might as well remove the 60,000 cap on sales so that buyers of Toyota hybrids aren’t penalized for their car’s popularity.

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  • Mitchell

    “Unfortunately, unless you earn more than $750,000 a year, you can’t be sure you will qualify for the full published credit for your vehicle. “

    Right there…Right there!, Conservative/Republican policies in action! I knew there was some politics and B.S. involved.

    Same thing for all of you guys that are actually fooled into believing Dubya’s tax cuts are for the average, middle-class American.

  • CLAY

    It truly boils the blood to see such tax shenanigans going on. A salesman at my local Toyota dealer mentioned the tax credit for hybrid vehicles, but he did not say anything about WHO could qualify for it. I’ll be getting in touch with him.

  • Daryl

    Truth is, individuals making $750k don’t buy $30k hybrids, if they indeed buy hybrids at all (unless it’s fleet).

    Sounds like this law was designed to look like it supports hybrids on the surface, but the devil in the details is that it only applies to people who don’t use it, therefore it doesn’t REALLY exist does it?

    I believe the IRS should be made to publish the REAL effect in numbers and people that b.s. ‘credits’ like this give.

  • thinkerbelle

    Guys, gotta read the whole article. It’s not LIMITED to people making over $750K, it’s just that the alternative minimum tax will make it smaller if you earn a certain amount and have too many deductions. So single people who actually pay taxes and don’t have a ton of other deductions will still get the full credit. Right? Please correct if I’m mistaken.

    I’m not saying it shouldn’t be fixed regardless.

  • RichardT

    Sorry if this offends the Republicans among you (I used to be one… no more) but nothing good of any kind has come out of this Bush presidency. The so called “hybrid tax credit” is no exception. My Toyota salesman, to his credit, warned me in advance that most people would likely not qualify for the full credit, even if they bought the car before last October. With luck, I might get something back, but I’m really not counting on it.

  • Bill

    LOL, you are all jumping on the bash Republicans band wagon, open your eyes, the Republicans have tried to do away with this problem, but it is your beloved Demoncrats, err, Democrats who fight the Republicans every step of the way and keep these taxes that hurt the lower income families, when are you going to wake up and see that Democrats are not really your friends?

    The democrats are already promising to raise taxes, on the very people this article is pointing out, yet you sit there and blame Republicans.

    Me thinks it is time you looked into the mirror and took a long hard look at your beloved Democrats as they are the true anti-America party.

  • R

    Please educate yourself before spouting off. Low-income families already pay close to no taxes thanks to our progressive tax structure. The problems are with the huge loopholes for high-income earners. Why do high-income individuals need tax breaks?

    I say bring on the taxes, its the best way to reduce consumption which is the root of the problem. Hybrid, PHEV, FC or whatever, the less consumed the better but I guess that would be completely “anti-American” based on your posting.

    Your blind support for the current administration’s economic policies is laughable. Chances are you don’t even benefit from the current “tax breaks” and loopholes.

    Lastly, why do you troll on a blog that is obviously pro-green? Get a life.

  • R

    Just to clarify, I meant bring on the consumption and use taxes.

    If Bush were serious about reducing oil consumption then why not make it revenue positive by taxing gas instead of subsidizing ethanol? Oh wait, its because oil companies would be hurt via reduced sales and the corn and ag lobby will get more subsidies!

    And don’t even try to argue increased gas taxes will hurt the economy. I’d rather know when I’m getting taxed at the pump then pay for nebulous subsidies through increased income taxes and deficit spending.

  • Bill

    LOL, “There you go again!”

    Raising taxes on fuel wont hurt anyone, it will just keep people from driving.

    LOL, do you not understand that prices of items are set on costs? Part of that cost is shipping, when you raise the cost of shipping you have to raise the cost of the product to the consumer in order to maintain your profit level.

    Why should I be hit for a fuel tax every time I buy something because you don’t like others having the F R E E D O M E of driving when ever and where ever they please.

    I am going to go out tonight and drive my gas hog smog belching 1970 Cuda just to burn up some fuel in your honor!

  • Ed

    The republicans have known about the problems with AMT and have ignored it. Instead of addressing it, they piled on additional tax breaks for the super wealthy. The Democratic leadership has promised to address it, if the Republicans don’t filibuster it in the Senate(They will probably demand Estate Tax repeal be tied to it)

  • DaShempy

    Married with 3 kids. My hybrid credit is zero because the rate after taking the child credit is less than the Alternative Minimum Tax. $2600 I was counting on down the drain. In fact, I figured out that the only way to get the full credit with 3 kids would be to have an adjusted income of $51,000 and have no deductions except mortgage interest on your taxes or $67,500 after adding back in all deductions.

  • Bill

    To all you Democrats, maybe if you got off the Democrat system of keep em all down so that they need us just to barely survive, you may see that there is a whole real world out there for you to live in and enjoy without having to depend on the Democratic to toss you a table scrap now and then.

    God help us if the Dummycrats get there health care system forced upon us Americans. You will then get to wait for years for procedures and end up dying instead of living.

    Why do you think so many people come to the USA from Canada and Europe for their medical care? Because the system they have and what the Democrats want to force upon us does not work!

  • To DaShempy

    Man you people take the cake, your tax bill is so low you don’t hardly pay any tax and you complain that you are not getting more of a break?

    Here is a clue, the Hybrid Tax Credit is there to come off of your tax bill. If you only owed 1000 in taxes then you only get 1000 dollars of the credit. You don’t have enough of a tax liability to warrant more.

    If you owed eight thousand dollars in taxes then you get the whole 2600 off your tax bill, unless you fall into the AMT at which point you get nothing, you can thank the Demoncrats for that, they are the ones who fight to tax Americans to death. Republicans have tried to cut taxes and the Democrats fight them every step of the way.

  • Bill

    “When there are four children (by the way, California ranks second, behind Utah, for average family size), there is a tiny income zone around $80,000 where this family would be entitled to almost the full hybrid tax credit. Otherwise, they will not be eligible for the full credit until their income passes $750,000. At the other extreme, below $60,000, their regular tax liability is zero, hence, no credit applies.”

    NOTICE that the tax liability is ZERO for that family, in simple terms for you slow Democrats, that means the Family Did Not Pay a Dime in Taxes, there is no place for the credit to be deducted from.

    This is real simple math people, yes even for a Democrat!

    The other side of the above quote from the article is clear that you are in the AMT and do not get a credit. Thanks again Democrats.

  • Bill

    Planning Ahead for the Hybrid Car Tax Credit
    Dear Tax Guide, I’m thinking of buying a hybrid car next year. The model I’m thinking about looks like it will include a hybrid car tax credit of $3,150. So will this tax credit increase my refund, or does this tax credit not apply to me because I already get a refund?
    Dear Reader,

    Tax credits reduce tax liabilities. So many people mis-understand this. The reason you have been getting refunds is that your withholding and estimated tax payments have exceeded your tax liabilities. Having an additional tax credit, such as for buying a new hybrid car, will certainly boost your tax refund. But it may or may not boost your refund by the full amount of the tax credit, which you are estimating will be $3,150.

    Let’s give two examples to explain the concept. Joe is a salaried employee and earns $50,000 a year. His federal income tax withholding amounts to $8,595 for the whole year. (Let’s also assume Joe is single with no kids.) I calculate a 2004 tax liability of $7,256 with no other deductions or credits. Based on this straightforward situation, Joe would have a refund of $1,339. (Tax liability minus withholding.)

    Now, Joe is thinking about buying a hybrid car. The anticipated hybrid car tax credit will be $3,150. This tax credit first reduces Joe’s tax liability (but not below zero). So Joe’s tax liability is now $4,106. (Gross tax liability minus hybrid car tax credit.) This in turns boosts Joe’s tax refund to $4,489. So it does look like the hybrid car tax credit increased Joe’s refund. But it’s really reducing his liability.

    Mary, Joe’s sister, is also thinking of buying a hybrid car. But Mary’s tax liability is (let’s say) $1,000. If she buys the same car with a $3,150 tax credit, only $1,000 of that tax credit will be applied to her taxes. The rest of the credit will sit unused. Yes, it will still boost her refund, but not as much. It would be better if Mary lets Joe buy the car, and Joe lets Mary use the car whenever she wants. Under the new tax law, Joe is prohibited from selling the car or giving the car to Mary (or to anyone else). The IRS will eventually clarify these rules, and will let people know how long they need to keep their car before re-selling it. Also, Joe still has a $4,106 tax liability, so if he buys two cars, this will reduce his tax another $3,150.

  • Bill

    Hybrid Tax Credit Strategies and Limitations

    From William Perez,
    Your Guide to Tax Planning:

    Limitations, Recapture, and Tax Strategies

    Limitations on the Hybrid Tax Credit
    The hybrid tax credit is a non-refundable tax credit. The credit will reduce your regular income tax liability, but not below zero. The credit will not reduce your alternative minimum tax, if that applies to you. Your regular income tax liability is found on Form 1040, page 2, on the line that reads “Tax.” For example, this is found on Line 44 of the 2005 Form 1040.
    If you are eligible for multiple tax credits, there are special ordering rules for which credit to take first. The hybrid tax credit is taken last after all the following credits take been taken into full account:

    Child and dependent care tax credit
    Credit for the elderly and disabled
    Adoption tax credit
    Child tax credit,
    Mortgage credit,
    Hope and Lifetime Learning tax credits,
    Credit for retirement savings,
    Foreign tax credit,
    Nonconventional fuel credit, and
    Electric vehicle credit.
    So the formula for your maximum hybrid tax credit is as follows:

    Regular income tax liability
    minus the total of these other tax credits
    minus the tentative minimum tax calculated under the AMT rules.
    No Carryover
    Any tax liability left over by these reductions will be the maximum dollar limit of your hybrid tax credit.

    If your hybrid tax credit exceeds your maximum dollar limit, the excess is not refundable, and is lost forever. The excess cannot be carried over to another year, or given away to another person.

    Tax Strategies for the Limitations on the Hybrid Tax Credit
    If you cannot use all your hybrid tax credit, I have some good news for you. It might be possible to have a family member purchase the car for you. The key is following the law, and making sure that the person who buys the car has enough tax liability to take full advantage of the hybrid tax credit.
    The law forbids taxpayers from buying a new hybrid vehicle with the intention of reselling the car. The taxpayer must purchase the hybrid car or truck with the firm intention of using the vehicle personally. Therefore, I would caution against re-selling the car or giving the car as a gift. Here’s what I suggest you do instead.

    The taxpayer with the highest regular tax liability should purchase a qualifying hybrid car or truck. The taxpayer would be the owner of the car, would register the car in his or her own name, and would be responsible for insurance, maintenance, and other car ownership responsibilities. But the taxpayer would allow you to use the car, as needed, for free.

    For example, Sarah wants to buy a new hybrid car, but she can use only $1,500 of the estimated $3,000 hybrid tax credit. Her brother Steven has a substantial tax liability and can take advantage of the full amount of the hybrid tax credit. Steven should purchase the hybrid car for his own personal use, but allow Sarah to borrow the car as she needs it. Under no circumstances should Steven sell or give the car to Sarah.

    The tax law might allow a taxpayer to lease a qualifying vehicle. The lease would have to be for a period of time not less than the “entire economic life of the vehicle.” For example, Steven (from the example above) might write up a lease contract in which he leases to Sarah the hybrid car “for the entire economic life of the vehicle.” Under such a long-term lease agreement, Steven would retain full ownership of the hybrid car, and Sarah would only be leasing it. However (and this is a big however), I would caution you to wait until the IRS releases regulations to interpret this new tax law before entering into such an arrangement, just to make sure you are fully eligible to take advantage of the hybrid tax credit. When I suggested this strategy to CCH federal tax analyst Mark Luscombe, he responded, “Maybe we will just have to wait for the [IRS] regulations to clarify this.” I agree.

    Recapture: Penalty for Selling Your Hybrid Car Early
    The new law for the hybrid tax credit requires taxpayers to recapture their hybrid tax credit if they re-sell their hybrid car or truck. Further details will be provided by the IRS when they issue regulations to interpret and implement this new tax law. For now, I would advise against selling, leasing, or giving hybrid cars away until we find out how long you have to keep the car.

    Small Businesses Can Use the Hybrid Tax Credit
    The hybrid tax credit is available to both individuals and businesses, including self-employed people. Business owners are accustomed to depreciating their business assets, and sometimes taking a Section 179 deduction to expense some or all of their assets in the first year of use.
    The cost basis of a hybrid car must be reduced by the allowable amount of the hybrid tax credit. After cost basis is reduced, the remaining basis can be depreciated or expensed as a Section 179 deduction.

  • Dan

    Question: when did any politician become honest? or trust worthy? regardless of party. Simple formula public life = coruption. power corupts and there is no solution for that. while it’s true the current president has a lot of money in the oil business. And has paid lip service to the alternative fuel area. I will wait to see what the next guy does, rep, or dem I don’t care. If it’s a democrat then we will have a basis to compair… I’m not holding my breath.

  • DaShempy

    I wasn’t expecting my tax bill to be less than zero but I was expecting to be able to lower my tax bill down to zero as stated in the original IRS publications on this credit. I will be paying a total of $6600 in federal taxes this year, $14000 in taxes if you add in property and state income taxes. And according to the original publications on this, it was simple math. If you are subject to the AMT, no credit, otherwise, you can use the credit to reduce your liability to zero. Here is the quote, “A tax credit is subtracted directly from the total amount of federal tax owed, thus reducing or even eliminating the taxpayer’s tax obligation.” from http://www.irs.gov/newsroom/article/0,,id=157632,00.html.
    Where’s the caveat that you can reduce or eliminate only down to the AMT limit??? In addition, the summary on the credit lists 4 requirements to qualify for the credit but never mentions AMT (found at http://www.irs.gov/newsroom/article/0,,id=157557,00.html). Bait and switch just like the article says.

  • Leiah

    It amazes me that you took the time to spell out freedom, in all CAPS with spaces and still misspell it while calling democrats slow.

    Since you’re a republican… it really doesn’t surprise me since you all seem to live in a separate reality from us anyway.

  • carl

    Either way, the tax incentive did what it was supposed to do – sell more hybrids. :grin

  • RichardT

    Interesting that Bill assumed that because I am no longer a Republican, I must be a Democrat. Simply put, the current mess and corruption we have in this country – of which a false tax credit is only a sign, is because of the Republicans AND the Democrats. Both are equally divorced from the reality of life in America (and frankly don’t give a rat’s as long as we poor fools keep electing them into office.)Again, this administration has been just about the most corrupt and contemptuous of the American people of any in our history – and this tax ‘credit’ that isn’t a credit should come as no surprise to anyone. I wouldn’t expect any better from any victorious Democratic administration in 2008. Strong third party or independent candidate, anyone?

  • BT

    The hybrid tax credit was publicized as a way to offset the increase cost of the vehicle. It was publicized as more of a “rebate” when the new highly touted Energy bill was put into place. Now, most of us are doing our taxes and realizing that we were not given all the details. This solidifies the fact that the currect administration has no interest in cleaning up our air or ensuring a livable enviornment for our children. How many of us would not have spent the hard earned extra cash if we would have known the government would not soften the blow? Shame on them!

  • Bill

    Yep thats right all you crying Democrats, this Republican got 100% of his Hybrid Tax Credit on the 2006 Honda Accord I bought.

    Maybe you all need to understand that you have to owe taxes before you can get a tax break!

  • dave in ny

    buyer beware ! whether democrat or republican, don’t trust any politician when it comes to your money. check with a qualified tax professional and the the irs web page before buying. frankly, the way new cars depreciate, we are all better off buying used cars, and putting high quality, properly inflated tires on the car, a strategy that is proven to be one of the best mileage enhancers.

  • Georg from Oregon

    Don’t expect a FEDERAL TAX CREDIT from the IRS !

    *** I did get the State refund *** I Iove Oregon!

    But the fact is that most of us got screwed over on this by the IRS / Democrats / Republicans ….. whoever … The money is gone – down the drain

    What’s amazing for me is how everybody seems to swallow this with ease ☺

    Because in reality it went down like this:
    A) You going to a new restaurant everybody is talking about.
    B ) You are ordering from the menu given to you by the waitress.
    C ) Then, to make sure nobody can spread the word, they’ll tell you some puny excuse about a broken cash register or so, until closing time comes up (Haven’t we all wondered how the IRS will keep track of who’s going to get the credit at the end ?? )
    D ) Finally at closing, you get stuck with a bill that’s based on a ‘secrete” price list with outrageous pricing.

    One would think a scam like this wouldn’t work, but they sure pulled this “HYBRIDE TAX SCAM” off for over 60’000 Toyota Prius buyers along 🙂

    Don’t get me wrong, I love my Prius, and I’m not saying don’t buy a Hybrid.


  • Jon from Wisconsin

    Politics aside, the simple fact is that IRS publications in early 2006 did NOT indicate that tax liability could not be reduced below tentative minimum tax. They DID indicate that tax liability could be reduced to zero.

    Now they changed the rules. That is a classic bait and switch tactic that is creating hardship for well-intentioned Americans. WRITE YOUR CONGRESS-PERSON INCESSANTLY!

  • bill

    I watch C-span sometimes. Democrats do not bother themselves with truth even with it standing in front of them. They are the tax guys. They have us believing that poor people pay an unfair share of taxes while rich people pay none. LOOK IT UP! Facts are available. Democrats are aware of them, too, but they cynically make hay with our stupidity.

  • Alex in MD

    If anyone here thinks that this is just a Republican plot/mistake/scheme, you’re missing the point. This is straight from the Department of Bright Ideas. Don’t you need most of the Congress to pass the Energy Act of 2005? That includes Dems too.

    Blaming Republicans? You’re missing the point. They’re all morons. I just called several Senators, including the home team here in MD, Mikulski and Cardin. I called Domenici who’s on the Energy Comittee, and Inohofe who’s on the environmental comittee. Because once this gets out that there is a boondoggle regarding A) Gas Economy and B) Environmental Car issues, there will be quite a stir. Don’t bitch about it, do something. Do the moral equivalent of a mob with torches and pitchforks coming down on these people via mail, phone calls and e-mail.