The Advantages And Disadvantages Of The Hybrid Car Tax Credit

Introduction

January 2006 will mark the beginning of the new hybrid car tax credit, which is one of the items added to the energy bill. President Bush has not yet signed the energy bill, but does states he will be doing so in the weeks to come. This tax break will make it easier for new car buyers to buy an environmentally and check book friendly car.

How it works?

2005 is marking the end of the old $2000 clean fuel vehicle tax deduction. The new hybrid car tax credit is divided into two parts with tax credits ranging from $400 to $3400. The great news is that a credit is much better than a deduction since the credit does reduce the taxes that are owed. The deduction simply reduces the amount of taxable income. The problem is that the full tax credit will be limited to the first 60,000 hybrid cars sold in 2006 per automaker. After that threshold is breached, the credit will be phased out over the following five quarters. This hybrid car tax credit is scheduled to end in 2009, but for many this credit will end a lot sooner.

In order to get the tax deduction, the car must be driven by you by December 31, 2005. But when is the best time to buy a hybrid car based on the hybrid car tax credit? Well, that is going to be determined by the model you want to buy and which bracket your income falls into. Here's a good example for you: It is believed that the Toyota Prius is going to have a hybrid car tax credit of $2750. For those who are in the 25% income bracket, a $2000 deduction is comparable to a $500 tax credit. Basically, if the car you want to purchase has a hybrid car tax credit that is more than $500, then it would make sense to buy your hybrid car in 2006 rather than the end of 2005.

Starting January 1st and continuing through until the automaker sells their 60,000 hybrid cars, the hybrid car tax credit will continue at 100% through the next quarter. The two quarters that follow that will show a 50% drop in the hybrid car tax credit resulting in a 25% drop every two quarters after that.

Conclusion

So far the Toyota Prius is showing the largest advantage as far as the hybrid car tax credit goes. The hybrid car tax credit of $2750 could significantly reduce the taxes owed to the IRS or result in a healthy tax return. Not only do you gain or save money on your taxes by purchasing a hybrid car, but also the gas you will save makes your overall savings well worth the purchase.