When considering the economics of buying a hybrid car, a shopper’s first best question has nothing to do with gas consumption, maintenance costs, or resale value. Surprisingly, the most important dollars-and-sense consideration is whether or not you pay the Alternative Minimum Tax (AMT). The answer to that question will determine if you qualify for the federal hybrid tax credit—a few hundred dollars or a couple of thousand dollars, depending on the vehicle purchased and when you buy it.

Unfortunately, many of the consumers most likely to buy a hybrid—prosperous but not ultra-wealthy families with kids and mortgages—are the most likely to pay the AMT. Therefore, a core group of hybrid shoppers will not receive the well-publicized tax credit. This loophole calls into question the federal government’s ability and commitment to encouraging consumers to conserve energy by purchasing a hybrid.

What is the AMT?

The history of the AMT dates back to the Tax Reform Act of 1969. The goal of the legislation was to prevent millionaires from exercising every possible credit and loophole, and thus entirely evading taxes. Sounds like a good idea? However, because the rates were not adjusted for inflation, the AMT now affects more and more of the middle class as well as the rich. According to the New York Times, nearly 30 million tax payers will be affected by 2010.

A few AMT rules-of-thumb:

  • If you owed AMT in the past, you are likely to pay it again.
  • The larger your family, the harder it is to escape the AMT.
  • Homeowners with incomes between $150,000 and $400,000 are very likely to be subject to AMT.
  • Residents of California, New York, and any other state that charges state income tax are more likely to fall into the AMT bucket.

The exceptions:

  • Single people earning between about $25,000 and $115,000 should escape AMT, and therefore find the hybrid tax credit useful.
  • If you earn more than $750,000 per year, then your taxes are likely to exceed the AMT. The hybrid tax credit would be allowable.

These are rough guidelines. See a tax professional for detailed advice.

Hybrids, AMT, and Conservation

As long as the AMT remains in effect, any future legislation that gives tax payer credits for energy conservation will exclude the growing number of Americans who pay AMT. Any serious government proposal about encouraging consumers to buy hybrids, plug-in hybrids, electric cars, or flex-fuel vehicles via tax credits must consider the effects of the AMT.