New Tax Credit for 2006
New and improved hybrid car incentives—full-dollar tax credits—took effect on Jan. 1, 2006. For most hybrid car buyers, the new credits are more valuable than the prior federal tax incentives, which were only offered as reductions of taxable income.

As of June 5, 2006, the I.R.S. has ruled on credit amounts for all hybrids and has posted a summary of the hybrid tax credits, and the appropriate forms. The exact amount of your credit may vary. Please consult a tax professional.

Current Models
Make Model Tax Credit
Ford Escape Hybrid (2wd) $2,600
Ford Escape Hybrid (4wd) $1,950
Honda 2006 Accord Hybrid* $1,300
Honda 2005 Accord Hybrid $650
Honda 2006 Civic Hybrid (auto) $2,100
Honda 2005 Civic Hybrid (auto) $1,700
Honda 2005 Civic Hybrid (manual) $1,700
Honda Insight (auto) $1,450
Lexus GS 450h $1,550**
Lexus RX 400h $2,200**
Mercury Mariner Hybrid $1,950
Nissan Altima $2,350
Saturn Vue Green Line $650
Toyota Camry Hybrid $2,600**
Toyota Highlander Hybrid $2,600**
Toyota Prius $3,150**
*2006 Honda Accord Hybrid AT without updated control calibration qualifies for a credit amount of $650.
** Credits for Toyota hybrids no longer qualify for the full amount indicated here. See bolded message below.

The basic rules:

  • The vehicle must be placed in service after 12/31/05 and purchased on or before 12/31/10.
  • The original use of the vehicle must begin with the taxpayer claiming the credit. The credit may only be claimed by the original owner of a new, qualifying, hybrid vehicle and does not apply to a used hybrid vehicle.
  • The vehicle must be acquired for use or lease by the taxpayer claiming the credit. The credit is only available to the original purchaser of a qualifying hybrid vehicle. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit. For qualifying vehicles used by a tax-exempt entity, the person who sold the qualifying vehicle to the person or entity using the vehicle is eligible to claim the credit, but only if the seller clearly discloses in a document to the tax-exempt entity the amount of credit.
  • The vehicle must be used predominantly within the United States.

These rules are relatively straight-forward. But there’s more and these are more foggy:

  • The new tax credit sets a limit of 60,000 hybrids per carmaker. Toyota hit the 60,000 mark in June, 2006. (Honda and Ford are unlikely to reach 60,000 hybrids in 2006.) Buyers who purchased one of the five Toyota or Lexus gasoline-electric hybrid models before Oct. 1, 2006 will qualify for 100 percent of the credit. Buyers purchasing Toyota hybrids on or after Oct. 1 will receive a credit equal to 50 percent of the amount listed above.
  • The credit for Toyota hybrids will stay at 50 percent for two quarters, fall to 25 percent in the subsequent two quarters, then expire on Oct. 1, 2007.
  • The credit amount is based on the purchase date of the vehicle.
  • The new law for the hybrid tax credit might require taxpayers to recapture their hybrid tax credit if they re-sell their hybrid car or truck.

Surprisingly, for taxpayers who take a lot of deductions or use the Alternative Minimum Tax, the previous tax deduction (which bit the dust in 2005) was more valuable. Details:

  • The credit will not reduce your alternative minimum tax, if that applies to you. As stated in Toyota’s statement about the new tax credits: "The benefit of the hybrid vehicle tax credit will also be substantially reduced or eliminated if the individual purchaser is subject to the federal alternative minimum tax."
  • The credit will reduce your regular income tax liability, but not below zero.
  • If you are eligible for multiple tax credits, the hybrid tax credit is taken last after all the other credits (e.g., child care tax credit, mortgage credit, retirement savings credit) have been taken. 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.

As you might guess, it’s a good idea to get advice from a tax professional before filing.

By the way: Based on info currently available, the Honda Insight manual, as well as the upcoming Saturn VUE and Chevy Malibu hybrids, may not meet the necessary emissions levels required for the tax credit.

Prior Incentives
Hybrid car buyers in 2004 or 2005 could claim a $2,000 one-time deduction on 2004 or 2005 tax returns.
Because the tax break was a deduction, its value varied, depending on your tax bracket. If you’re in the 33% tax bracket, a $2,000 deduction reduced your tax bill by as much as $600. If you’re in the 15% tax bracket, it might have been worth $300.

> See the I.R.S. website regarding "Clean-Fuel Vehicle Deductions Available for Certain Models."

How it worked:

  • Under the prior rules, the I.R.S. certified all hybrids available to consumers.
  • The deduction was limited to new cars, but you could go back as far as 2000, if you haven’t already taken the deduction.
  • The deduction was a one-time deal.