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.

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.