Tax Credits and Cars

A number of hybrid cars are eligible for a credit on 2008 tax returns.

A number of hybrid cars are eligible for a credit on 2008 tax returns.

Hybrid and alternative-fuel vehicles are well-known for their green credentials, but they can also save you money on your taxes. Thanks to the Energy Policy Act of 2005, certain cars purchased beginning in 2006 can earn credits of up to $4,000 — a handsome discount when factored into the price of a car.

The 2005 act supplanted clean-fuel vehicle deductions of $2,000 on some models, said Internal Revenue Service spokeswoman Michelle Lamishaw.

To be eligible for the Energy Policy Act of 2005, vehicles have to fall into one of four categories: fuel cell, advance lean-burn technology, hybrid or alternative fuel, she said. For 2008 tax returns, certain diesel cars also qualify for a tax credit. Most of the cars that qualify are hybrids, but there is one alternative-fuel car, the Honda Civic GX, and a few light-duty diesels.

Thanks to help from the IRS and Maggie Doedtman, manager of advice delivery for H&R Block, here are answers to some frequently asked questions regarding tax credits on green cars.

• What are the Credits Offered for the 2008 Tax Year?
• What's the Difference Between a Credit and a Deduction?
• When Did I Have to Purchase My Car to Claim the Credit?
• Do I Have to Itemize My Taxes to Claim a Credit?
• What Forms and Documentation are Needed?
• Can I Purchase an Eligible Car in 2009 and Claim a Similar Credit on My 2009 Taxes?
• Can I Claim a Credit for a Car I Purchased Before 2006?
• If I Keep My Car, Can I Earn Credits Again in the Future?
• What if I Purchased My Car and Took Delivery on Separate Days?
• What if I Purchased a Used Car That Qualifies for This Credit?
• What if I Lease a Car That Qualifies for This Credit?
• Can I Claim Anything for Selling a Car That Qualifies for This Credit?
• What if I'm Tax-Exempt?
• Are Vehicles That Run on E85 Covered?
• Can I Claim a Credit on a Car I Plan to Operate Outside the Country?
• I'm a Business Owner; Do I Get any Special Tax Credits or Deductions?

What are the Credits Offered for the 2008 Tax Year?

The IRS offers credits on a number of hybrid nameplates, one alternative-fuel vehicle and four light-duty diesel models. The credits range from $250 to $4,000 and vary according to make and model year. Listed below are the available credits on qualifying models; if you purchased any of these models in 2008, these credits can be claimed on your 2008 tax return.

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What's the Difference Between a Credit and a Deduction?

Think of credits as cash that goes straight to the bottom line of your tax return. If you owe money, a credit will lower that amount; if you are due a refund, the credit is added to the refund. A deduction, meanwhile, lowers the amount of your taxable income.

From 2003 through 2005, hybrid vehicles were eligible for a $2,000 tax deduction. The Energy Policy Act of 2005, however, says vehicles bought since then are eligible for a tax credit.

"Generally, that means people get back more money with a credit, or they owe less tax, than [with] a deduction," Lamishaw said.

For example, suppose you bought a two-wheel-drive Ford Escape Hybrid in 2005. You could claim a $2,000 reduction in taxable income on your 2005 tax return, which might translate into an extra $700 in your refund, or $700 less that you owe. Under the new legislation, however, if you bought an '08 Escape Hybrid in 2008, you would receive an extra $3,000 — no calculations needed.

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When Did I Have to Purchase My Car to Claim the Credit?

If you purchased your car anytime in 2008, you can claim the credit on your 2008 tax return. For certain cars, the amount you can claim depends on the exact date you bought it. That's because the Energy Policy Act of 2005 says that when a manufacturer reaches 60,000 sales of eligible vehicles — as reported to the government each quarter — the credits will begin to be phased out. Under the current legislation, the 60,000 quota doesn't renew itself, which means once the credits have been completely phased out, they're gone.

So far, Toyota and Honda are the only automakers to have reached the mark. Toyota sold its 60,000th hybrid car in the summer of 2006, while Honda reached its limit in the third quarter of 2007. For the 2008 tax year, no Toyota or Lexus is eligible for a tax credit. Honda hybrids still get credits, but they're not as high as they once were.

As stipulated by the Energy Policy Act, those who purchased a Honda hybrid between Jan. 1, 2008, and June 30, 2008, can claim 50 percent of the deduction — $1,050 on a Civic Hybrid, for example, instead of the original $2,100. Buyers who purchased a Honda hybrid between July 1, 2008, and Dec. 31, 2008, can claim 25 percent of the credit. Honda hybrids bought on or after Jan. 1, 2009, are ineligible for tax credits.

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Do I Have to Itemize My Taxes to Claim a Credit?

No. A credit is figured separately than itemized deductions, Doedtman said.

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What Forms and Documentation Are Needed?

To claim a credit, individuals must submit Alternative Motor Vehicle Credit Form 8910 and the vehicle's bill of sale from the dealer, Doedtman said.

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Can I Purchase an Eligible Car in 2009 and Claim a Similar Credit on My 2009 Taxes?

Not in all cases. The Energy Policy Act imposed a limit of 60,000 eligible vehicles per automaker, beginning Jan. 1, 2006. After an automaker hits the mark, the IRS phases out the credits in 50, 25 and zero percent steps over the course of a year. Toyota and Honda have already passed the mark, so you won't be able to claim the full credit — or, in some cases, any credit — on a Toyota, Lexus or Honda hybrid purchased in 2009. Other automakers will follow when they reach the quota.

Under the current legislation, the 60,000 quota doesn't renew itself. Various groups, including the Bush administration, have pushed Congress to remove the caps.

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Can I Claim a Credit for a Car I Purchased Before 2006?

No; the credits didn't go into effect until Jan. 1, 2006. However, if the vehicle you purchased qualified for a deduction under the previous program, you can amend an earlier tax return, Doedtman said.

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If I Keep My Car, Can I Earn Credits Again in the Future?

No. The tax credit is a one-time award.

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What if I Purchased My Car and Took Delivery on Separate Days?

The only time this is an issue is if you buy a car in one year but get it delivered the next; the delivery date determines which tax year the credit can be applied to.

For example, say you bought a 2008 Nissan Altima Hybrid on Dec. 27, 2008, but took delivery a week later, on Jan. 3, 2009. You could claim the $2,350 credit, but you would have to do so on your 2009 tax return, which you'll file in 2010.

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What if I Purchased a Used Car That Qualifies for This Credit?

Sorry, the credit is only available to new-car buyers. If you buy the car from the original owner, you might be able to convince him to give you an extra discount, considering the tax reward he reaped. Considering that hybrids and alternative-fuel vehicles are in relatively high demand, though, you might be told to take a (tax) hike.

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What if I Lease a Car That Qualifies for This Credit?

Lessees are not eligible to claim a tax credit. The leasing party — say, a dealership — can claim the credit. You might be able to finagle an extra discount because of the money they save, but that's up to them.

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Can I Claim Anything for Selling a Car That Qualifies for This Credit?

No, but you don't have to pass the savings on — though a savvy shopper might offer a lower price for the car, considering that with the tax break you essentially paid a discounted price for it.

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What if I'm Tax-Exempt?

If you're tax-exempt, the party that sells you the new car may claim the tax credit, but they're required to disclose the amount they claim. Whether they pass the savings on is up to them.

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Are Vehicles That Run on E85 Covered?

No. Although ethanol-based E85 is an alternative to regular gasoline, cars that run on E85 do not currently qualify for tax breaks.

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Can I Claim a Credit on a Car I Plan to Operate Outside the Country?

No. According to the IRS, if you purchase a qualifying car inside the U.S. but plan to use it predominantly outside the country, you cannot claim a tax credit.

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I'm a Business Owner; Do I Get Any Special Tax Credits or Deductions?

Businesses that purchase eligible vehicles can take advantage of the same tax credits as individuals.

If the vehicle purchased qualifies for both an energy tax credit and a business expense deduction, business owners can take both the credit and the deduction, Doedtman said. To calculate the deduction and depreciation, however, the vehicle's price must first be reduced by the amount of the credit.

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