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Hybrid Car Tax Credit

by Darren

Let’s take a look at the hybrid car tax credit, which could help you save money on the purchase of your next hybrid vehicle. In the United States, this tax break is officially known as the Alternative Motor Vehicle Credit. The program is relatively straightforward.

“The Energy Policy Act of 2005 replaced the clean-fuel burning deduction with a tax credit. A tax credit is subtracted directly from the total amount of federal tax owed, thus reducing or even eliminating the taxpayer’s tax obligation. The tax credit for hybrid vehicles applies to vehicles purchased or placed in service on or after January 1, 2006.”

The credit is available to the original car purchaser, and is based on a scale that’s derived from the make and model. Here’s the schedule for 2009. As you can see, the tax break ranges from $1.950 to $3,000, depending on the vehicle selected.

In certain cases, the tax break can mean it’s advantageous to upgrade to a hybrid vehicle. The main key is to consider a concept known as “Total Cost of Ownership.” When you add up the payments, minus any tax breaks, and then calculate the fuel costs/savings, you can roughly surmise whether purchasing a hybrid vehicle makes sense for you.

If you plan on getting a hybrid car tax credit, you’ll need to act fast. The government is phasing out these credits as American consumers start to adopt hybrid vehicles on a wider basis.

The success of certain vehicles is the reason the tax credits are being phased out. Take, for instance, how well Ford has done selling hybrids. They’ve done such a good job that the tax credit for their hybrid vehicles is being halved, before being eliminated completely.

“According to the IRS, Ford has sold 66,000 of its hybrids — mostly the less efficient Ford Escape and Mercury Mariner SUVs — while GM has sold half that. The law that created the tax credit presumes that any carmaker selling more than 60,000 hybrids no longer needs a tax credit to persuade buyers to purchase one.”

The tax credit on purchasing a Ford hybrid vehicle will be halved, from $3,400 to $1,700, before being shelved permanently.

The bright side should be somewhat obvious. Since these cars are selling better, chances are prices will become much lower. That means the government shouldn’t need to subsidize hybrids as they become more mainstream. It looks like the government program has worked, and now sales volume of certain hybrid cars is sufficient.