Clock is Ticking To Maximize the Tax Credit For Honda Hybrids

The numbers are in.  Through June 30, 2007, Honda has sold a total of 58,872 hybrid vehicles since the beginning of 2006. 

Why are these sales figures important? Even though the hybrid car tax credit is in place through 2010, the credit begins to phase out for each manufacturer upon selling its 60,000th hybrid as follows:

• The full credit is allowed through the end of the quarter following the quarter during which the manufacturer sells its 60,000th hybrid vehicle after January 1, 2006.

• The credit is cut in half for the subsequent two quarters.

• The credit is then cut to twenty-five percent of the original credit for the subsequent two quarters.

• No credit is allowed for vehicles purchased from that manufacturer thereafter.

To qualify for this tax credit, the hybrid purchased must be a new vehicle. According to the IRS, "the original use of the vehicle must begin with you", so used vehicles don't qualify. Leasing a hybrid doesn't qualify the lessee for the credit. "If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit," explains the IRS. And the final condition to qualify for this tax credit is that you use your hybrid predominantly within the United States.

Current Credit

Toyota and Lexus hit the 60,000 threshold during the second quarter of 2006, so the credit for their hybrids is fully phased-out as of September 30, 2007.  According to the IRS, here are the hybrid vehicles eligible for this tax credit as of October 1, 2007:

Model Year 2008

• Chevrolet Malibu hybrid — $1,300
• Ford Escape 2WD Hybrid — $3,000
• Ford Escape 4WD Hybrid  — $2,200
• Mazda Tribute 2WD Hybrid — $3,000
• Mazda Tribute 4WD Hybrid — $2,200
• Mercury Mariner 2WD Hybrid — $3,000
• Mercury Mariner 4WD Hybrid — $2,200
• Saturn Aura hybrid — $1,300

Model Year 2007

• Chevrolet Silverado 2WD Hybrid Pickup Truck — $250
• Chevrolet Silverado 4WD Hybrid Pickup Truck — $650
• Ford Escape Hybrid 2WD — $2,600
• Ford Escape Hybrid 4WD — $1,950
• GMC Sierra 2WD Hybrid Pickup Truck — $250
• GMC Sierra 4WD Hybrid Pickup Truck — $650
• Honda Accord Hybrid AT —  $1,300
• Honda Accord Hybrid Navi AT — $1,300
• Honda Civic GX — $4,000
• Honda Civic Hybrid CVT — $2,100
• Mercury Mariner 4WD Hybrid — $1,950
• Nissan Altima Hybrid — $2,350
• Saturn Aura Hybrid — $1,300
• Saturn Vue Green Line — $650

Even Energy Efficient Alternatives Lose to the AMT

"While the amount of this tax credit can be substantial, the Alternative Motor Vehicle Credit won't benefit you once the Alternative Minimum Tax (AMT) kicks in.  And unless something's done to alleviate the current AMT crisis, there's a very good chance you'll get hit by the AMT this year," warns Schwartz.  Experts predict that the number of taxpayers subject to the AMT will jump six-fold, from 4 million taxpayers in 2006 to 23 million taxpayers in 2007.

"To make matters worse, unlike many other tax breaks, you're generally not allowed to carry forward the unused portion of this tax credit to a subsequent year.  So if you're hit by the AMT and can't use the credit the year you purchase the vehicle, you lose it," says Schwartz.

Is there any way around the AMT?  Yes, if the hybrid is purchased through a business, the business owner gets to carry back the unused "general business credit" to the prior year, and then carry it forward for twenty years.  There's a pretty good chance that most taxpayers will avoid the AMT at least once during this twenty-two year window and be eligible to claim this tax credit.

About Andrew D. Schwartz CPA
Andrew D. Schwartz, CPA is the editor and founder of www.FindAGoodCPA.com, a site where taxpayers can interact with CPAs and EAs based on each professional's specialty. Schwartz has provided tax and basic financial planning advice in interviews with various media, including the Washington Post and Wall Street Journal. He is available for interviews.