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Just when "green" vehicles are growing in popularity thanks to rising gasoline prices, Congress overhauled their tax benefits. The best known and widely available tax break, the clean-fuel deduction, is abolished after this year. In its place is a new credit with four complex components.
The new "Alternative Motor Vehicle Credit" equals the sum of four components. They are the:
The new credit is much more complex than the old deduction but the two tax breaks share some common elements. The purchaser generally must be the first individual or business to use the vehicle. The vehicle must not be acquired for resale and the vehicle must be made by a manufacturer.
Most importantly, the new credit is not automatic. You have to claim it on your return.
Most people will only be able to take advantage of the hybrid vehicle component of the new credit because these are the only "green" vehicles currently being mass produced. Fuel cell and alternative fuel vehicles, such as cars that run on hydrogen, are still experimental.
Hybrids combine an electric motor with a gasoline-powered engine. Some of the advanced technologies typically used by hybrids include regenerative braking, which converts energy during coasting and braking into electricity, and an automatic start/shutoff feature, which shuts off the engine when the vehicle comes to a stop and restarts it when the driver presses the accelerator. The electric motor also provides additional power to assist the engine in accelerating, passing or climbing, which allows a smaller and more efficient engine to be used.
The amount of the credit depends on the vehicle's fuel economy, fuel savings and other factors. The credit ranges from $400 to $2,400. An additional conservation credit is awarded to hybrid vehicles with certain lifetime fuel savings ratings, ranging from $250 to $1,000. You could save as much as $3,400. The credit will phase-out after a manufacturer sells 60,000 vehicles.
Some auto makers and environmental groups have started to estimate the value of the credit for different vehicles. These are just estimates. The IRS will have the final say and is expected to issue its official figures soon.
There are some big differences between the new credit and old deduction for hybrid vehicles. Heavy SUVs no long qualify. The new credit also cannot offset alternative minimum tax (AMT).
Before you buy a hybrid vehicle, give our office a call. The old clean-fuel deduction is still on the books for 2005. Depending on your finances, you may save more money buying a hybrid this year and taking the deduction. On the other hand, it might be better to wait and claim the new credit. We'll make sure you get the most tax savings you can.