Tax Credits For Hybrid Cars and Alternative Motor Vehicles (AMVs)

The Energy Policy Act of 2005 replaced the clean-fuel burning deduction with a tax credit. A tax credit is subtracted directly from the total amount of federal tax owed, thus reducing or even eliminating the taxpayer’s tax obligation. The tax credit for hybrid vehicles applies to vehicles purchased or placed in service on or after January 1, 2006.

The credit is only available to the original purchaser of a new, qualifying vehicle. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit.

Hybrid vehicles have drive trains powered by both an internal combustion engine and a rechargeable battery. Many currently available hybrid vehicles may qualify for the tax credit.

These models have been certified for the credit in the following amounts:

*2006 Honda Accord Hybrid AT and Navi AT without updated calibration qualify for a credit of $650.

Special Certifications: Phase-Out Rates

After reviewing the second quarter 2007 sales of Toyota Motor Sales USA Inc., the Internal Revenue Service announced that purchasers of qualifying Toyota and Lexus vehicles may continue to claim the Alternative Motor Vehicle Credit. Given the number of vehicles sold, the phase out period for Toyota vehicles began on Oct. 1, 2006.

Toyota sold 70,641 qualifying vehicles to retail dealers in the quarter ending June 30, 2007. This brings the cumulative sales of qualified Toyota hybrid vehicles sold from the period of Jan. 1, 2006, through June 30, 2007, to 344,083.

Taxpayers may claim the full amount of the credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th qualified vehicle. The sale of Toyota’s 60,000^th qualified vehicle occurred in the quarter ending June 30, 2006. Therefore, for qualifying vehicles purchased between Oct. 1, 2006 and March 31, 2007 consumers may claim 50% of the credit amount.  Consumers who purchase qualifying vehicles between April 1, 2007 and Sept. 30, 2007, may only claim 25% of the credit amount. 

No credit is allowed after September 30, 2007

The applicable credit amounts are as follows:

Details of the Tax Credit

Even though a manufacturer has certified a vehicle, a taxpayer must meet the following requirements to qualify for the credit:

1. The vehicle must be placed in service after 12-31-05 and purchased on or before 12/31/10.
    
2. The original use of the vehicle must begin with the taxpayer claiming the credit.
   
   a. 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.
    
3. The vehicle must be acquired for use or lease by the taxpayer claiming the credit.
   
   a. 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.
   
   b. 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.
    
4. The vehicle must be used predominantly within the United States.

Consumers seeking the credit may want to buy early since the full credit is only available for a limited time. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th hybrid or advance lean burn technology. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.

For example, F Company is a manufacturer of hybrid motor vehicles, but not advanced lean burn technology motor vehicles.  F Company sells its 60,000th hybrid car on March 31, 2006.

• Ms. Smith buys an F Company hybrid car on June 30, 2006, and claims the full credit.
• Ms. Maple buys an F Company hybrid car on Dec. 31, 2006, and claims 50 percent of the credit.
• Mr. Grey buys an F Company hybrid car on June 30, 2007, and claims 25 percent of the credit.
• Mr. Green buys an F Company hybrid car on July 1, 2007, and is unable to claim the credit, because the credit has phased out for F Company vehicles.

Related Items

• Updated List of Qualifying Hybrid Cars and Alternative Motor Vehicles
• IR-2006-12, IRS and Treasury Provide Guidance to Hybrid Manufacturers
• FS-2006-14, Highlights of the Energy Act for Individuals

Vehicles Purchased or Placed in Service 2001 through 2005

In August 2002, the IRS announced that it had certified the first hybrid gas-electric automobile as eligible for the clean-burning fuel deduction, effective 2001. Federal law allowed individuals to claim a deduction for the incremental cost of buying a motor vehicle propelled by a clean-burning fuel. A tax deduction is subtracted from income, thus reducing the amount of adjusted gross income on which the taxpayer is taxed.

The deduction is only available to the original purchaser of a new, qualifying vehicle. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit.