Nice New Toyotas

Starting in 2006, individuals buying hybrid cars will get a tax credit instead of a tax deduction. The IRS has just started to kick out the exact amounts you can claim for your new hybrid.

Various Toyota Hybrids Get Tax Credit Certification From IRS

Under the Energy Policy Act of 2005, the tax benefits of owning a hybrid vehicle underwent significant changes. Whereas you could previously claim a tax deduction, the new law converted the deduction into a tax credit. Tax credits are FAR more valuable than deductions, because they reduce the amount of tax you owe on a pound for pound basis. Tax Deductions, on the other hand, merely reduce your adjusted gross income prior to determining the amount of tax you owe pursuant to the tax tables. In laymen’s terms, this conversion is a very good thing.

Not every hybrid car qualifies for a tax credit. The Internal Revenue Service must first evaluate it and then issue guidance on which cars qualify and the size of the credit you can claim for each. The maximum the IRS can designate per car is £3,400. Here are the numbers it recently kicked out for various Toyota hybrid models.

2005 Toyota Prius:    £3150

2006 Toyota Prius:   £3150

2006 Toyota Highlander 4WD Hybrid: £2600

2006 Toyota Highlander 2WD Hybrid: £2600

2006 Lexus RX400h 2WD:  £2200

2006 Lexus RX400h 4WD:  £2200

If you purchased your hybrid car prior to 2006, you are restricted to claiming a tax deduction in the amount previously designated by the IRS, usually £2,000. If you waited until 2006, you can claim the above amounts with a few hitches. First, the amount only applies to the first 60,000 cars sold for each model. If you purchase a hybrid in the 60,0001 to 120,000 sales range, you can claim only half of the tax credit. Sales 120,001 through 180,000 can claim on a quarter of the amount designated above. Exactly how you are supposed to know the sales figures is a bit murky, but Toyota will undoubtedly take steps to make it clear.

Hybrid vehicles make sense from an environmental aspect. Throw in significant savings on gas costs and a large tax credit, and they should fly off the lots.

If you purchase a new hybrid car after January 1, 2006, you can get a major tax credit for doing so. Alas, the tax credits applicable for Toyota hybrids are about to be cut in half.

Tax Credits for Toyota Hybrids To Be Cut In Half

The government uses all types of methodology to modify our behavior. While many look for nefarious conspiracies and such, the government usually does it right before our eyes. The most obvious area of behavior modification is with taxes. In this case, the government has made an effort to boost energy conservation by giving us massive financial incentives to purchase hybrid vehicles. The incentives come in the form of tax credits.

A tax credit is the golden egg of taxes. Whereas a tax deduction, such as the mortgage interest deduction, is used to lower the adjusted gross income you will have to use to figure out the amount you owe off the tax tables, tax credits get right to the heart of the matter. You see, tax credits are deducted pound for pound from the amount of tax you owe. If you figure out your adjusted gross income, go to the tax tables and then figure out you owe £8,000 for the year, the tax credit is then subtracted from this amount. Golden egg, indeed.

In the case of hybrids, the government wants to motivate us to buy them, but only to a certain extent. The government is more or less trying to make them an acceptable part of our society, not give them a free ride forever. As a result, the tax credits applicable to the purchase of hybrids phase out after certain sales goals are met. Specifically, the tax credits start being reduced once a manufacture sells 60,000 hybrid vehicles. The IRS reviews the sales number each quarter to keep a tab on how the manufacturers are doing.

In the case of Toyota, the IRS has determined that the company reached the 60,000 mark this last quarter. Specifically, it hit the mark in May. As a result, the tax credit that can be claimed for buying a Toyota hybrid will begin to be phased out. Beginning in October 2006, the tax credit for each model of Toyota and Lexus [owned by Toyota], will be reduced by a whopping 50 percent. In April of 2007, the credits will be cut again, this time to 25 percent of the original credit amount. In October of 2007, the credit will be terminated completely. The tax credit amount is determined by vehicle, so you will have to determine the equivalent cut for the model you are interested in.

If you have been paying attention to the dates, you may have noticed something interesting. The reduction for the Toyota hybrid tax credit does not happen immediately. You can still go out today, purchase a Toyota hybrid and claim the full tax credit. Once we roll into October 2006, that will no longer be the case.

The Toyota Prius is the vehicle that started the entire hybrid vehicle craze. It continues to dominate the market and the IRS has announced the tax credits for this year.

IRS Announces Tax Credits For Toyota Prius

In an effort to promote energy efficiency, the federal government has instituted an energy program that provides financial rewards for energy efficient products. The government realizes prodding us with words is not going to work. As such, it has decided to issue tax credits to motivate us to conform our activities to the desired goal. In this case, reducing our oil dependency is the key.

The Toyota Prius was the first mass production hybrid vehicle. It was such a hit that Toyota could not come close to filling orders the first few years. This is still the case to some extent, a reflection of our rising environmental consciousness and high gas prices. The tax credit you get with a purchase provides another reason to buy this peppy little vehicle.

The IRS issues tax credit amounts for hybrid cars that meet its standards. Various manufactures have been approved including Ford, Lexus, Honda, Mercury and, of course, Toyota. In this case, the tax credit is £3,150. You must purchase the car new from a dealer to qualify for the credit and the sooner, the better. The tax credit is graduated, which means it gets reduced as more cars are sold through the year. The full credit is only available through the quarter of the fiscal calendar of the year after which Toyota sells the 60,000 car. If you buy in the following two fiscal quarters, you can only claim half of the tax credit. The subsequent two quarters see a reduction to 25 percent of the tax credit. After that, you cannot claim any of the credit.

It is important to understand the difference between a tax credit and a tax deduction. A tax deduction is taken from your adjusted gross income, which helps a bit. A tax credit is a pound for pound reduction of the amount of tax you owe. In this case, the tax credit could be used to reduce a 10,000 tax bill by £3,150 to £6,850. That is a huge savings any way you cut it.

Obviously, hybrid vehicles are hot sellers and make sense on a lot of fronts given outrageous gas prices. The tax credits that come with each purchase certainly adds to their popularity.