• A Recipe on Financing Your New Car
• Price Discrimination and Buying a Car
• Your Financial Report Card
• Banks with APY over 4.5%
• A Few Extra Bucks
• Simplify! Simplify! Simplify!

• Current Tax Rebate Incentives for Hybrid Vehicle Purchases
• Updated List of Best Hybrid Deals Ranked by Break-Even Mileage

By Jenny Phu
Posted June 5, 2008

With the steep rise in gas prices surpassing $4 per gallon, many consumers are looking to purchase hybrid vehicles to economize on fuel. Tax incentives help ease the cost of purchasing hybrid vehicles. The Energy Policy Act of 2005 introduced tax credits for hybrid vehicles purchased or put in service on or after January 1, 2006 and before December 31, 2010.

Before purchasing hybrid vehicles, you should know what vehicles qualify, how much tax credit you may receive, and how to apply. Most of all, you must determine whether or not the hybrid vehicle will pay off for you in the long run. From this information, you must decide whether or not a hybrid vehicle will payoff in the long run.

In deciding whether or not the hybrid vehicle will pay off for you, consider several factors: Will you be willing to sacrifice horsepower for mileage? Will you be driving the vehicle on the highway more often, or on city streets? How often do you drive on a weekly basis? Will the mileage of the hybrid vehicle pay off for you according to your choices?

You must be purchasing as the original, first-hand owner of the hybrid vehicle and must be using the vehicle for your own personal or business use to be able to claim the tax credit. There may be a penalty for reselling the hybrid vehicle. In addition, the hybrid vehicle must be driven mainly in the United States. Hybrids do not qualify for similar credits, such as electric vehicle tax credits.

Be sure to check with the manufacturer of the vehicle you are choosing to make sure you qualify for the credit. Each manufacturer limits the number of vehicles that qualify for a tax credit to 60,000 cars. Also, the amount of tax credit that you can receive may begin to "phase out" meaning that the amount of credit may start to decrease the later you buy the vehicle. Rates decrease to 50% of the original credit if the hybrid is purchased two to three periodic quarters after the manufacturer has reached the 60,000 limit. Rates decrease to 25% during the fourth and fifth quarters. After the fifth quarter, any further hybrid purchased from them may no longer qualify. To see what kind of credit your hybrid vehicle may qualify for, speak with your local dealership or manufacturer. The credit for some manufacturers such as Lexus, Toyota, and Honda have either been exhausted or reduced.

Different models of hybrid vehicles have different tax credit rates. If you would like to maximize your tax credit, you may research on different websites, such as www.fueleconomy.gov to research how much tax credit you may receive on particular models and/or manufacturers of hybrid vehicles or on www.irs.gov for the Summary of the Credit for Qualified Hybrid Vehicles. Credits typically range from $400 to $3,400, and your manufacturer can issue a certification stating how much credit you qualify for.

To obtain the tax credit, you must fill out Form 8910 when filing your tax return. You will need the year, make, and model of the hybrid vehicle, the date you began to utilize the vehicle, the maximum amount of credit you may qualify for, and the phaseout percentage of the vehicle. If you are applying for other tax credits, the hybrid vehicle tax credit is the last credit to be calculated on your income tax form. If the amount of your hybrid vehicle tax credit in combination with your other credits exceeds the amount of your tax liabilities, the excess amount will not be refunded to you. 

Tip: Even if you purchased a hybrid vehicle prior to January 1, 2006, you may qualify for a “clean fuel” tax deduction worth up to $2,000. This deduction requires the hybrid vehicle to be new, driven mainly in the U.S., and meet state and federal emissions standards. To claim this deduction, you will need to fill out the 1040X for the year that you purchased the vehicle when filing your tax return.

Tip: According to the IRS intructions, Form 1040X must be filed within 3 years after you filed the original return, or 2 years after you paid the tax.

"File Form 1040X only after you have filed your original return. Generally, for a credit or refund, Form 1040X must be filed within 3 years after the date you filed the original return or within 2 years after the date you paid the tax, whichever is later. A return filed early is considered filed on the due date."

A list of the current tax rebate incentives for hybrid vehicles is tracked in this thread at the Money Economics Forums.