What Factors Determine a Hybrid Cars Tax Break

If you are thinking of purchasing a hybrid vehicle to take advantage of the hybrid cars tax break offered by the IRS, you should know how the tax break works and how the amounts of the tax credit are determined by the IRS. Understanding how the IRS calculates the amount of tax credits available to tax payers that purchase hybrid vehicles is difficult at best. Therefore, this article will attempt to explain the hybrid car tax credit and how it is determined for each type of hybrid vehicle.

History of the Hybrid Car Tax Credit

The hybrid car tax credit in its present form was created under the Energy Act of 2005 and went into effect in January 2006. The credit will be phased out in 2010, at which time Congress will reevaluate the credit and decide if the credit will be extended or reenacted.  The actual name for the tax credit is the “Alternative Motor Vehicle Credit.”

How the Tax Credit Works

Vehicle manufacturers are responsible for providing certification to the IRS that its particular hybrid vehicles qualify for tax credits under the Energy Act of 2005. Once the IRS accepts the certification from the manufacturer, then customers that purchase the certified hybrid vehicle are eligible to claim the tax credit.

They IRS allows manufacturers of certified hybrid vehicles to sell a certain number of vehicles that are eligible for 100% of the tax credit. For example, under current rules, only the first 60,000 hybrid vehicles that are sold are eligible for the full credit. After the initial 60,000 vehicles are sold, the tax credit is still available—but at a reduced rate. After these first 60,000 vehicles are sold, vehicles sold within six months after that date will receive 50% of the available credit. Following that six-month period customers that purchase the certified hybrid vehicle are eligible for 25% of the credit up until the date that one year has passed since the 60,000th vehicle was sold. After one year of the 60,000th vehicle sale, the tax credit is no longer available for a particular certified hybrid vehicle.

How the Tax Credit is Calculated

In determining how much of a tax credit that a specific hybrid vehicle will qualify for, the IRS uses a very complex formula based on vehicle weight, type of hybrid technology, fuel economy and proprietary emissions data. However, there are two main factors which will determine how much of a tax credit a vehicle is eligible for.

Conservation Credit - Certified hybrid vehicles will qualify for a $250 credit if the vehicle is expected to save at least 1200 gallons of gas over its useful lifetime. For the purposes of determining the useful life of a vehicle, the IRS estimates 120,000 miles. Savings are based on comparisons made to vehicles of similar weight and class that uses standard gas powered engines. For each additional 600 gallons of gasoline a particular vehicle is expected to save, the certified hybrid vehicle will qualify for an additional $250 in tax credits. The maximum for the conservation credit is $1000.

Fuel Economy Credit - This component of the credit amount is also based on the vehicles fuel economy when compared to gas powered engine vehicles of similar weight and class. This part of the formula provides a $400 credit if the vehicle gets at least 25% better fuel economy. The tax credit can then also be increased by $400 for every 25% improvement after the initial 25%. The maximum for this portion of the credit is $2400. The maximum of both parts of the combined credit is $3400.