Does Your Hybrid Vehicle Qualify for Full Tax Credits?

Not all 2007 tax credits for hybrid vehicles are the same, even if the taxpayer bought the same car. How is that possible?

The 2005 Energy Act providing tax credits for new hybrid vehicle owners include qualifications that the owners must meet. Some of the qualifications such as the following are clear cut.

1. The vehicle must be bought on or before 12/31/10 and driven or used after 12/31/05.

2. The tax credit may be claimed only by the original owner of the new hybrid. A preowned or used hybrid vehicle does not qualify for the credit.

3. In order to take advantage of their credit, some first time owners of hybrid vehicles might have to recapture their tax credit if they resell their hybrid car or truck.

4. The vehicle must be driven mainly in the United States.

5. If a hybrid vehicle is leased, the leasing company has the right to claim the tax credit, as the credit is only available to the original purchaser of the hybrid vehicle.

So far the hybrid owner only needs to take basic precautions. But the Energy Act goes farther and places other qualifications to consider such as the date of purchase and number of hybrids sold per car manufacturer.

The number of hybrids is limited by 60,000 hybrids per car manufacturers that may be claimed for taxes. Two hybrids that have met the 60,000 mark in June 2006 are Toyota and Lexus hybrids. Buyers who purchased their Toyota hybrid or Lexus hybrid before October 1 will have 100 percent of their tax credit. While buyers who purchased their hybrids on or after October 1 will have a tax credit that is reduced by 50 percent.

That means that some buyers of a new Prius or Lexus hybrid vehicle will qualify for the full $3,150 tax credit. While other buyers of the same vehicle will receive only a $1,575 tax credit. Therefore, the amount that the taxpayer may claim is not only based on the amount the vehicles qualifies for but also is based on the date the hybrid was purchased.

It should be noted that the tax credit will not last forever, but will be phased out by 2010. This is hurried along by reducing the amount of tax claims until it is gone.

For example, after 60,000 vehicles are sold, the taxpayer may claim the full amount of credit for that first quarter. For the second and third quarter after 60,000 vehicles are sold, the taxpayer may claim half or 50 percent of the tax credit. During the fourth and fifth quarter, the taxpayer may claim 25 percent of tax claim. After the fifth quarter the 60,000 vehicles are sold, no tax credit may be claimed.

A further limitation in claiming a tax credit is based on the type of vehicle purchased. This involves the amount of reduced emissions and fuels saved by the said vehicle. Only the type of vehicle is considered. Price is not a factor. You would guess that the more expensive hybrids would bring a higher tax credit. But, this is not always the case. For example, a $40,000 Lexus RX 400h hybrid commands a maximum of only a $2,200 tax credit.

Another consideration in limiting tax credits is the Alternative Minimum Tax (ATM), which may disqualify some other taxpayers.

Other hybrid manufacturers such Honda, Ford, GM have not meet the 60,000 limit and still qualify for the full amount. You do not have the same considerations, at the present time, that others such as Toyota hybrid owners must contend with.