If you bought a hybrid car in 2007 or plan to buy one before 2010, you may be able to save a huge chunk on your tax bill. Hybrids purchased or placed into service after December 31, 2005 may be eligible for a federal income tax credit of up to $3,400. In addition to hybrid vehicles, alternative fuel vehicles (AFV) also may be eligible for a federal tax credit of $4,000. Right now only Honda's compressed natural gas car has qualifed for the AFV tax credit.
A tax credit is a direct reduction in your tax bill, which makes them a lot better for your pocketbook than a tax deduction. While a tax deduction is subtracted from your income, and then you must still calculate taxes based on your current tax rate, a tax credit is subtracted directly from the taxes you've already calculated.
Credit amounts begin to phase out for any manufacturer that has sold over 60,000 eligible hybrid vehicles. There's a complex formula the government uses to figure out the tax credit on each model. The IRS will announce when a manufacturer exceeds the 60,000 sales figure. Right now only Honda and Toyota models are facing a phase-out of their tax credits.
You must meet the following requirements to claim the credit:
- You must be the one who first started using the vehicle.
- You must either buy or lease the vehicle for yourself and not for resale.
- You must use the vehicle mostly in the U.S.
- You must place the vehicle in service before December 31, 2010.
To claim your tax credit, file Form 8910 - "Alternative Motor Vehicle Credit" - with your tax return.
In this series, I focus on tax credits available for Fords, GMs, Hondas, Nissans and Toyotas.
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