For this year, you can claim a
deduction for purchasing (not leasing) a qualifying new (not used)
clean-fuel vehicle, including a hybrid gas-electric vehicle like
the Toyota Prius or Ford Escape. Both of these cars (and several
other 2005 model-year vehicles) will entitle you to a $2,000
write-off on this year's Form 1040.
The 2005 Energy Act repeals the deduction effective after this
year. Actually that's a good thing for many folks, because the new
law replaces that deduction with four new tax credits that could
save you substantially more at return-filing time. So you might be
better off waiting until 2006 to get yourself a new
energy-efficient ride. The credits kick in for new vehicles put to
use on or after Jan. 1.
Credit No. 1 for Hybrid Vehicles: 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 hybrid cars and trucks with gross vehicle weight
ratings of 8,500 pounds or less (in other words, your
garden-variety autos and light trucks) has two parts. The first
part is a so-called fuel economy credit. It can range between $400
and $2,400, based on fuel-efficiency improvements compared with
2002 model-year vehicles. The second part is a so-called
"conservation credit." It can range between $250 and $1,000, based
on expected fuel consumption reductions over the life of the
vehicle. The minimum combined credit for a hybrid vehicle that's
eligible for both the fuel economy part of the credit and the
conservation part will be $650. The maximum combined credit will
be a whopping $3,400.
To give you an idea of how much these credits might be worth,
the current version of the Toyota Prius would apparently qualify
for a combined credit of about $2,750. As you can see, that's far
better than the $2,000 deduction available for this year. Informed
speculation says the Honda Insight hybrid would qualify for a
combined credit of $1,450, while the Honda Civic hybrid would bag
a $2,350 credit. Of course, we don't yet know the credit amounts
for 2006 models, but the numbers cited here will probably be in
the ballpark.
Credit No. 2 for Lean-Burn Technology Vehicles:
Qualified "lean burn" vehicles are passenger cars and trucks with
internal combustion engines that use a direct injection of a fuel
mix with a higher-than-normal percentage of air. Some new diesel
cars that will soon be introduced in the U.S. will qualify. Many
car enthusiasts (including me) are anxiously awaiting the new crop
of diesels, which are already well-accepted in Europe. They will
achieve far better fuel economy without sacrificing much
performance (unlike some hybrids, which, on steep hills, are often
passed by oxcarts).
The lean-burn tax credit amounts are the same as those for
hybrid vehicles. So the minimum combined credit amount for a lean
burn vehicle that qualifies for both the fuel economy and
conservation credits will be $650, while the maximum combined
credit will be $3,400. Which vehicles will qualify and how much
the credits will be for them remains to be seen. Stay tuned.
Credit No. 3 for Fuel-Cell Vehicles: Qualified
fuel-cell vehicles include, for example, cars that run on hydrogen
cells. The fuel-cell credit is also made up of two parts. The
first part is a flat amount based on the vehicle's weight. The
second part is a sliding scale figure based on fuel-efficiency
improvements compared with 2002 model-year vehicles. The maximum
combined credit amount can be as high as $12,000 ($8,000 flat
amount plus $4,000 for fuel efficiency). This sounds really great,
but fuel-cell vehicles are a rarity. It will be interesting to see
if the new tax credit changes the status quo.
Credit No. 4 for Alternative-Fuel Vehicles:
Qualified alternative-fuel 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%
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. Once again, you will not find very many qualifying
vehicles running around right now. We shall see if the new tax
credit makes a significant difference.
