A Tax Fact from The Tax Institute at H&R Block

More and more people are going green with their vehicles, saving the planet and some tax moolah along the way.

They are choosing from a wide range of hybrid, alternative fuel and lean-burn technology models to reduce their gas consumption and costs, while also lessening their fuel emissions to help the environment.

Hybrid vehicles are those powered by both an internal combustion engine, which uses gasoline, and a rechargeable battery. Alternative fuel vehicles are fueled solely by an alternative fuel, such as compressed natural gas. Advanced lean-burn vehicles generally run on diesel fuel, and incorporate direct fuel injection technology to achieve 125 percent of the 2002 model year city fuel economy rating.

To encourage green driving, the government provides federal tax credits to the buyers of such vehicles, and credits are also available from some state and local governments. Many currently available vehicles may qualify for the federal tax credit, which can be sizeable.

The credit, enacted into law as part of The Energy Policy Act of 2005, lowers your regular federal tax liability. However, the credit is not a refundable credit and cannot be used to lower your alternative minimum tax liability. It can be claimed for hybrid vehicles purchased and placed in service on or after Jan. 1, 2006.

The credit is only available to the original purchaser of a new, qualifying vehicle. If a qualifying vehicle is leased, the leasing company gets to claim the credit.

How to claim the credit
Auto makers must certify to the IRS that its hybrid models meet the proper specifications, and then be able to show a high enough number of sales of those models in order for them to be added by the IRS as eligible for the credit.

The IRS says that, generally, taxpayers may rely on the manufacturer’s certification that a specific make, model and model year vehicle qualifies for the credit and the amount of the credit for which it qualifies.

The date of purchase and the cost of the technology used in the vehicle generally determine the amount of the credit you can get on a qualified vehicle. Some purchasers are eligible for the full credit, while others will receive only part of it as the credit is phased out.

Taxpayers may claim the full amount of the available credit up to the end of the first calendar quarter after the manufacturer records its sale of the 60,000th hybrid or advanced lean-burn vehicle. For the second and third quarters after the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit; for the fourth and fifth quarters, 25 percent of the credit. No credit is allowed after the fifth quarter. Currently, although the credit is no longer allowed for Toyota or Lexus vehicles due to the phaseout, full or partial credits are allowable for certain Honda, Ford, Mercury, Chevrolet, GMC, Mazda, Nissan, Saturn, Volkswagen and Mercedes-Benz vehicles.

The date a vehicle was placed in service determines the tax year in which the credit may be claimed, while the date of purchase determines the percentage of the credit. 

In addition, a taxpayer must meet the following requirements to qualify for the credit:

• The vehicle must be purchased and placed in service on or after Jan. 1, 2006, and on or before Dec. 31, 2010.
• The credit may only be claimed by the original owner of a new, qualifying, vehicle and does not apply to a used vehicle.
• The vehicle must be acquired for use or lease by the taxpayer claiming the credit.
• For vehicles used by tax-exempt entities, the person who sold the qualifying vehicle can claim the credit.
• The vehicle must be used predominantly within the United States.

For a list of eligible vehicles for this tax year and more details about the credit, visit www.digits.hrblock.com.

This Tax Fact is brought to you by The Tax Institute at H&R Block.

To view other helpful tax information or listen to our Tax Fact podcasts, visit www.digits.hrblock.com

As always . . . everyone’s tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Fact is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.