Tax Tip of the Week for December 5, 2005

Changes are ahead if you’re thinking of buying a hybrid vehicle. At the end of this year, the current tax deduction will be replaced by a potentially more valuable tax credit. And the IRS recently added two more models to the list of qualifying vehicles.

Hybrid vehicles have become very popular as gas prices increase. They combine a small, efficient gasoline engine with an electric motor. Clever engineering lets them recapture energy to charge the batteries when they’re braking. They generally provide better gas mileage than a comparable gasoline-powered vehicle, but they cost more.

For some years, you’ve been able to claim a tax deduction if you buy one of these “clean fuel” vehicles. For 2005, the deduction is $2,000. But beginning in 2006, this will be replaced by a tax credit. The amount of the credit will vary for each vehicle. It’s based on a formula depending on the vehicle weight and fuel economy.

Generally, a credit is worth more than a deduction because it directly offsets the tax dollars you owe. The exact benefit depends on your own particular tax situation, though. You claim the deduction or credit when the vehicle is placed in service, and you must be the original owner of the vehicle. So if you’re planning to buy a new hybrid in December, you might gain a bigger tax break by delaying your purchase until January. But be sure to run the numbers before you make this decision.

Each year the IRS certifies which makes and models of cars and SUVs qualify for the deduction. Currently, the list includes various models made by Ford, Mercury, Honda, Toyota, and Lexus.

For more information about the tax benefits, or to claim a deduction for a past purchase, please contact our office.
Seattle Bellevue Tax Accountants