Starting in 2006, individuals buying hybrid cars will get a tax credit instead of a tax deduction. The IRS has just started to kick out the exact amounts you can claim for your new hybrid.
Various Toyota Hybrids Get Tax Credit Certification From IRS
Under the Energy Policy Act of 2005, the tax benefits of owning a hybrid vehicle underwent significant changes. Whereas you could previously claim a tax deduction, the new law converted the deduction into a tax credit. Tax credits are FAR more valuable than deductions, because they reduce the amount of tax you owe on a dollar for dollar basis. Tax Deductions, on the other hand, merely reduce your adjusted gross income prior to determining the amount of tax you owe pursuant to the tax tables. In laymens terms, this conversion is a very good thing.
Not every hybrid car qualifies for a tax credit. The Internal Revenue Service must first evaluate it and then issue guidance on which cars qualify and the size of the credit you can claim for each. The maximum the IRS can designate per car is $3,400. Here are the numbers it recently kicked out for various Toyota hybrid models.
2005 Toyota Prius: $3150
2006 Toyota Prius: $3150
2006 Toyota Highlander 4WD Hybrid: $2600
2006 Toyota Highlander 2WD Hybrid: $2600
2006 Lexus RX400h 2WD: $2200
2006 Lexus RX400h 4WD: $2200
If you purchased your hybrid car prior to 2006, you are restricted to claiming a tax deduction in the amount previously designated by the IRS, usually $2,000. If you waited until 2006, you can claim the above amounts with a few hitches. First, the amount only applies to the first 60,000 cars sold for each model. If you purchase a hybrid in the 60,0001 to 120,000 sales range, you can claim only half of the tax credit. Sales 120,001 through 180,000 can claim on a quarter of the amount designated above. Exactly how you are supposed to know the sales figures is a bit murky, but Toyota will undoubtedly take steps to make it clear.
Hybrid vehicles make sense from an environmental aspect. Throw in significant savings on gas costs and a large tax credit, and they should fly off the lots.