Tax Credits and Cars

A number of cars are eligible for a credit on 2010 tax returns.A number of cars are eligible for a credit on 2010 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.

To be eligible for the credits, vehicles have to fall into one of five categories: fuel cell, advance lean-burn technology, hybrid, electric or alternative fuel, according to the Internal Revenue Service.  These credits expired at the end of last year, so your 2010 tax return is the last opportunity to claim one. (Plug-in electric cars are eligible for a tax credit — which hasn't expired — of up to $7,500 under a separate section of IRS code.)

Thanks to help from IRS spokesman Eric Smith and Lindsey Buchholz, senior tax research analyst for the Tax Institute at H&R Block, here are the answers to some frequently asked questions regarding tax credits on green cars.

What Credits Are Offered for the 2010 Tax Year?

The IRS offers credits on a range of nameplates. The credits range from $487.50 to $7,500 and vary by make, model year and sometimes trim level. Listed below are the available credits on qualifying models. If you purchased any of these models in 2010, these credits can be claimed on your 2010 tax return.

Tax Credits by Make, Model and Year
2010-2011 A3 TDI: $1,300*
2010-2011 A3 TDI: $650**
2009-2011 Q7 TDI: $1,150*
2009-2011 Q7 TDI: $575**
2009-2011 335d: $900
2009-2011 X5 xDrive35d: $1,800
2011 ActiveHybrid 750i/750Li: $900
2010-2011 ActiveHybrid X6: $1,550
2010-2011 Escalade Hybrid: $2,200 (2WD, 4WD)
2009 Escalade Hybrid: $2,200 (2WD) or $1,800 (4WD)
2009-2011 Silverado Hybrid: $2,200 (2WD, 4WD)
2009-2011 Tahoe Hybrid: $2,200 (2WD, 4WD)
2009 Malibu Hybrid: $1,550
2011 Volt: $7,500
2009 Aspen Hybrid: $2,200
2010 Sedan: $7,500
2009 Durango Hybrid: $2,200
2010 Escape Hybrid: $750† (2WD) or $650† (4WD)
2009 Escape Hybrid: $750† (2WD) or $487.50† (4WD)
2010 Fusion Hybrid: $850†
2009-2011 Sierra Hybrid: $2,200 (2WD, 4WD)
2009-2011 Yukon Hybrid: $2,200 (2WD, 4WD)
2009-2011 Civic GX: $4,000‡
2009 Tribute Hybrid: $3,000 (2WD) or $1,950 (4WD)
2011 E350 Bluetec diesel: $1,550
2010-2011 GL350 Bluetec diesel: $1,800
2009 GL320 Bluetec diesel: $1,800
2010-2011 ML350 Bluetec diesel: $900
2010-2011 ML450 Hybrid: $2,200
2010-2011 R350 Bluetec diesel: $1,550
2009 R320 Bluetec diesel: $1,550
2010 S400 Hybrid: $1,150
2010 Mariner Hybrid: $750† (2WD) or $650† (4WD)
2009 Mariner Hybrid: $750† (2WD) or $487.50† (4WD)
2010 Milan Hybrid: $850†
2009-2011 Altima Hybrid: $2,350
2011 Leaf: $7,500
2011 Cayenne S Hybrid: $1,800
2009 Aura Hybrid: $1,550
2009 Vue Hybrid: $1,550
2009-2011 Roadster: $7,500
2011 City: $7,500
2010-2011 Golf TDI: $1,700 (automatic) or $1,300 (manual)*
2010-2011 Golf TDI: $850 (automatic) or $650 (manual)**
2009-2011 Jetta TDI: $1,300*
2009-2011 Jetta TDI: $650**
2009-2010 Touareg TDI: $1,150*
2009-2010 Touareg TDI: $575**
2011 Touareg TDI: $900*
2011 Touareg TDI: $450**
2011 LiFe: $7,500

*If you took delivery from 1/1/10 to 6/30/10.
** If you took delivery from 7/1/10 to 12/31/10.
†If you took delivery from 1/1/10 to 3/31/10.
‡Natural-gas-powered Civic GX available in California, New York, Oklahoma and Utah.

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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.

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 legislation, however, if you bought a 2010 Escape Hybrid before April 2009, which is when Ford's vehicles received a small credit, you would receive an extra $750 — 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 2010, you can claim the credit on your 2010 tax return. For many 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 federal 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.

Ford, Honda, Toyota and Volkswagen are the only automakers to have reached the mark. Hybrids and diesels from a number of other brands are still eligible for full credits through Dec. 31, 2010. So are alternative-fuel vehicles, like the natural-gas-powered Honda Civic GX.

New legislation provides substantial credits for electric and extended-range electric vehicles until their respective automakers build 200,000 such examples, which likely won't happen for some time. Fuel-cell vehicles — at this point mostly one-off conversions, given the dearth of mass market models — also get tax credits, which aren't scheduled to expire until the end of 2014, Smith said.

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

Probably not. "If the purchaser is an individual rather than a corporation, they do not have to itemize their deductions," Smith said. "However, the credit is not a refundable credit, and each purchaser's tax situation must be separately considered."

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What Forms and Documentation Are Needed?

Buchholz advised retaining your vehicle's bill of sale, as well as the manufacturer's certification. You'll also want to submit the appropriate form — 8910, 8834 or 8936 — depending on which qualifying vehicle you bought.

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Can I Purchase an Eligible Car in 2011 and Claim a Similar Credit on My 2011 Taxes?

Probably not. Per the Energy Policy Act, credits for qualifying hybrids, alternative-fuel vehicles and diesels expire Dec. 31, 2010; as of this writing, there are no plans to renew the legislation.

The exception is for electric and extended-range electric vehicles, which are eligible for tax credits until their respective manufacturers make 200,000 examples.

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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. Legislation prior to that allowed for a tax deduction, rather than a credit, but it's a moot point: Buchholz noted 2006 is a closed tax year now, so you couldn't file an amended return for even the deduction.

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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, Buchholz said.

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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, Buchholz said.

For example, say you bought a diesel 2010 Volkswagen Jetta TDI on Dec. 27, 2009, but took delivery a week later, on Jan. 3, 2010. You could claim the $1,300 credit, but you would have to do so on your 2010 tax return, which you'll file this year.

It's important to remember that when you buy the car influences what credit it gets, Smith said.

"The acquisition date determines whether the vehicle qualifies for the credit, and the placed in-service [date] determines when to take the credit," he said. "For example, some credits expired at December 31, 2010.

If the vehicle was acquired before that date, the vehicle is eligible for the credit. But if it's placed in service in 2011, the credits could be taken on the 2011 return."

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

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

"For some credits, the credit can be applied to a converted vehicle, e.g., a gasoline vehicle converted to operate on a specific clean fuel," Smith said. But, he added, those are in case-by-case situations.

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

Lessees are not eligible to claim a tax credit, Buchholz said. The leasing party — say, a dealership — can claim the credit. You might be able to finagle an extra discount because of the money that was saved, but that's up to your dealer.

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Are Vehicles That Run on E85 Covered?

No, Smith said. 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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© 02/24/2011