Hurry if You Want
Certain
Models |
The high price
of gas has caused many people to consider buying more
fuel-efficient vehicles. In addition to spending less time at
the pump, these vehicles may also qualify for a generous tax
break. Several new federal income tax credits kicked in this
year for buying new fuel-efficient vehicles.
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DOUBLE TAX BREAK: Use a Home Equity Loan
to Generate More Savings
If you qualify for either the hybrid or alternative fuel
credit, you may be able to gain additional
tax savings by
financing your new vehicle purchase with a home equity
loan.
You can generally
claim a deduction for the interest on up to $100,000 of
home equity loan principal. Unless you are subject to
the alternative minimum tax (AMT), it doesn’t matter how
you spend the loan proceeds.
So using the money to buy a
new vehicle that generates a tax credit won’t negate
your rightful home equity loan interest deduction. Of
course,
you must compare the
interest rate charged on a home equity loan to what you
would have under other borrowing
alternatives.
Warning:
The home equity loan strategy won’t deliver the
expected federal income tax write-offs if you’re liable
for the AMT. Reason: Under the AMT rules, you
can only deduct home equity loan interest when you spend
the proceeds to acquire, build, or improve your primary
residence or a second home that you use as a personal
residence. (Internal Revenue Code Sections 56(e) and
163(h)) |
| Qualifying Ford and
Mercury |
|
| 2006 Ford Escape Hybrid
2WD |
$2,600 |
| 2006 Ford Escape
Hybrid 4WD |
1,950 |
| 2007 Ford Escape Hybrid
2WD |
2,600 |
| 2007 Ford Escape
Hybrid 4WD |
1,950 |
| 2006 Mercury Mariner
Hybrid 4WD |
1,950 |
| 2007 Mercury
Mariner Hybrid 4WD |
1,950 |
|
Qualifying
Chevy, GMC and Saturn |
|
| 2006 Chevy Silverado
Hybrid Pickup 2WD |
$
250 |
| 2006 Chevy
Silverado Hybrid Pickup 4WD |
650 |
| 2007 Chevy Silverado
Hybrid Pickup 2WD |
250 |
|
2007
Chevy Silverado Hybrid Pickup
4WD |
650 |
| 2006 GMC Sierra Hybrid
Pickup 2WD |
250 |
| 2006 GMC Sierra
Hybrid Pickup 4WD |
650 |
| 2007 GMC Sierra Hybrid
Pickup 2WD |
250 |
| 2007 GMC Sierra
Hybrid Pickup 4WD |
650 |
| 2007
Saturn Vue Green Line |
650 |
| Qualifying
Toyota and Lexus |
|
| 2005 Toyota
Prius |
$3,150 |
| 2006 Toyota Prius
| 3,150 |
| 2006 Toyota
Highlander Hybrid 2WD
|
2,600 |
| 2006
Toyota Highlander Hybrid 4WD |
2,600 |
| 2007 Toyota
Camry Hybrid |
2,600 |
| 2006 Lexus RX 400h
2WD |
2,200 |
|
2006 Lexus RX 400h
4WD |
2,200 |
|
2007
Lexus GS 450h |
1,550 |
| Qualifying
Honda |
|
| 2005 Civic
Hybrid MT |
$1,700 |
|
2005
Civic Hybrid CVT |
1,700 |
|
2006
Civic Hybrid CVT |
2,100 |
| 2005 Insight CVT |
1,450 |
| 2006 Insight
CVT |
1,450 |
| 2005 Accord Hybrid
AT |
650 |
|
2006
Accord Hybrid AT w/out update |
650* |
|
2006
Accord Hybrid AT with update |
1,300** |
|
*Without
updated calibration |
|
| **With
updated calibration |
| Sources: Internal Revenue Code Section
30B and IRS Releases 2006-56, 57, 67, 86, 98,
108, and 110) |
|
In this article, we'll
explain two of the credits and show you how to combine them
with another tax break for home equity loans (see the
right-hand box). We also list all of the IRS-approved credit
amounts to date.
Here’s what you need to know
about the two credits:
1.
Hybrid Vehicle Tax Credit
Qualified hybrid vehicles combine an internal combustion
engine with another propulsion system that relies on an
onboard rechargeable energy source like electric batteries.
The credit for purchasing (not leasing) a new (not used)
hybrid car or truck with a gross vehicle weight rating of
8,500 pounds or less can range between a minimum of $250 and a
maximum of $3,400. Previously owned vehicles do not
qualify.
To claim a credit for 2006, your new vehicle
must be put to use by the end of the year. The numerous
IRS-approved credit amounts announced to date are listed in
the right-hand chart.
Key Point: The process of
approving hybrid vehicle tax credit amounts will be ongoing as
the IRS and manufacturers collaborate to determine the amounts
and as new hybrid models become available. You can visit the
IRS Web site at www.irs.gov for updated
information.
Potential Downside of
the Hybrid Credit
Unfortunately, Congress decreed that the hybrid vehicle
credit will get phased out over four calendar quarters (in
other words, over 12 months) once the manufacturer has sold
over 60,000 qualifying vehicles. During the 12-month phase-out
period, credit amounts will first be reduced by 50
percent (for the two quarters starting with the second
quarter after the 60,000 vehicle threshold is reached) and
then by 75 percent (for the following two quarters).
After the 12-month phase-out period is over, no further
credits will be allowed for any hybrid vehicles produced by
that manufacturer. (Internal Revenue Code Section
30B(f))
Warning: According to the
IRS, Toyota Motor Sales USA, Inc. sold about 42,000 cars in
the first quarter of 2006. (IRS Release 2006-91.) It’s
likely that the 60,000 vehicle threshold was surpassed in the
second quarter (probably in May). If so, the hybrid credit for
Toyota and Lexus vehicles will be reduced to 50 percent of the
amounts listed above for 2006 purchases that occur after
9/30/06 (in other words, purchases in the fourth quarter of
this year).
Therefore, be advised that it may
be necessary to buy qualifying Toyota and Lexus vehicles
before October in order to collect the full credit
amounts.
The second downside is that you can potentially lose out on
all or part of your hybrid vehicle credit if you pay the AMT
in 2006. Why? Because the credit cannot be used to reduce your
federal income tax liability below your AMT liability amount
reduced by certain other credits. (Internal Revenue Code
Sections 30B(g)(2))
Finally, the hybrid credit will expire at the end of 2010
unless Congress takes further action.
2. IRS-Approved Alternative
Fuel Vehicle Credit
The credit for hybrid cars gets the bulk of the attention
but there is another new credit, for qualified alternative
fuel vehicles, that also kicked off in 2006.
Eligible
vehicles include cars and trucks that run solely on compressed
or liquefied natural gas, liquefied petroleum gas, hydrogen,
or any liquid that is at least 85 percent methanol. Reduced
credits are allowed for mixed-fuel vehicles that run on a
mixture of an alternative fuel and a petroleum-based fuel.
The maximum credit for garden-variety autos and light
trucks is $4,000. To claim a credit in 2006, you must buy (not
lease) a new (not used) vehicle, and put it to use by the end
of the year. The IRS has approved credit amounts for only two
cars so far. (Internal Revenue Code Section 30B(e) and IRS
Release 2006-109)
Qualifying Honda Vehicles, which run on compressed
natural gas:
- 2005 Honda Civic GX – $4,000
- 2006 Honda Civic GX – 4,000
Little-Known Negative
Fact About the Alternative Fuel Credit
As is the case with the hybrid vehicle credit, you can
potentially lose out on all or part of this alternative fuel
vehicle credit if you are liable for the AMT in
2006. Reason: The credit cannot be used to reduce
your federal income tax liability below the AMT liability
amount reduced by certain other credits. (Internal Revenue
Code Section IRC Sec. 30B(g)(2))
The good news: The alternative fuel credit is not
subject to any phase-out rule based on sales.
Finally, as is the case with the hybrid credit, the
alternative fuel credit will expire at the end of 2010 unless
Congress takes further action.
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