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Hybrid Tax Deductions Expire December 31

A Complex Tax Credit Replaces the Popular $2,000 Credit

October 25, 2005
The $2,000 tax deduction available to hybrid buyers disappears at midnight on December 31 this year, to be replaced by a tax credit that's yet to be defined.

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Consumers looking for a brand new Toyota Prius and planning to take the deduction ought to move quickly.

Toyota Motor Corp. has announced that the waiting list for its gas/electric Prius has grown to four months in the United States. That is up from a two-month wait a month ago.

The Toyota announcement followed yet another poll reporting the effect of high fuel costs on American consumers. More than half those surveyed by Sacred Heart University Polling Institute in Fairfield, Connecticut, replied that their next car will be smaller and more fuel-efficient.

About 45 percent of those surveyed said they will consider buying a hybrid.

Hybrids purchased by December 31 will carry the $2,000 deduction. Eligible vehicles are the Toyota Prius, Honda Insight, Lexus RX400h and hybrid versions of the Ford Escape, Honda Accord and Civic and Toyota Highlander.

In 2006, the tax break becomes a tax credit but only the first 60,000 hybrid vehicles that each manufacturer sells are eligible for the full benefit. Once a manufacturer sells those 60,000 units, the tax credit phases out within 18 months.

The value of the deduction over the tax credit depends on your tax bracket.

For people in the 33 percent bracket, the deduction amounts to $660 and a hybrid buyer can claim the one-time deduction with either an itemized or standard tax filing. On New Year’s Day everything will change.

The amount of the new tax credit will vary depending on the fuel efficiency and weight of the hybrid.

Even thought the Internal Revenue Service has not issued regulations on the tax credits, analysts suggest the credits will range from $3,150 on the Prius to $650 on the Accord.

Toyota plans to sell nearly 140,000 of the Prius in the United States this year, far more than the 60,000 vehicles that will qualify for the tax credit. Honda is second, with projections of 50,000 for 2005.

Once Toyota or any other automaker sells 60,000 hybrids, consumers will continue to receive the full credit in the next calendar-year quarter. But for the six months after that, the credit drops to 50 percent and then to 25 percent for the next six months. After that the credit is gone.

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