Tax Benefits for Fuel-Efficient Vehicles
With gas prices going through the roof maybe now is the time to take advantage of the energy tax incentives available for the purchase of hybrid vehicles. If you purchase a hybrid vehicle in any year before 2009 you may qualify for a tax credit that is made up of two separate credits;
- The increased fuel economy credit, ranging from $400 to $2,400, and
- The lifetime fuel savings credit, ranging from $250 to $1,000.
Thus, you can receive tax credits up to $3,400 depending upon the vehicle’s efficiency. If the vehicle is purchased for personal use, the credit will reduce the regular tax to zero, but any excess credit is lost. However, to the extent that the individual is subject to the alternative minimum tax (AMT), the credit provides no benefit at all. On the other hand, if some portion of the vehicle is used for business, then the credit is allocated between the personal credit and general business credit. Unlike the personal portion of the credit, the general business credit does offset the AMT, and any unused portion can be carried to other tax years.
There is also a limitation on the credit based on how many the manufacturer has produced. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.
As you can see, it is not as simple as you might think and, depending on your particular circumstances, you might not benefit from the credit at all. Thus, before you sign on the dotted line, you need to:
- Make sure you are not in the AMT and can benefit from the credit,
- Verify the amount of credit available for the vehicle you are purchasing, and
- Make sure the credit is not limited because the manufacturer
has exceeded the 60,000 car limit.
Additionally, you should evaluate whether the extra cost usually commanded for hybrid vehicles can be recouped by a combination of the tax benefit and anticipated fuel cost savings over the period you expect to drive the vehicle.
Standard Mileage Tax Strategy – If you use a vehicle for business, you have the option of deducting the actual expenses including fuel, repairs, insurance, etc., or deducting a standard amount for each business mile driven. The standard mileage rate is determined periodically by the IRS using average costs of operating a vehicle. With the increase in fuel costs, the IRS has raised the business mileage rate to 50.5 cents per mile. By using the standard mileage rate with a high fuel-efficient vehicle, it is conceivable that you could deduct more than the actual cost of operating the vehicle.
E Thomas Associates Inc. is a registered investment advisor in Kentucky.
Dave Smith & Tony King are Registered Representatives of and securities are offered through Dalton Strategic Investment Services, Inc., member FINRA & SIPC. 6408 River's Edge Rd, Greenville, OH 45331
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