Ask Money

Hybrid tax credits

Chris Farrell Mar 24, 2009

Question: My car is on its last legs. Its engine is slowly dying. I know I am going to need to buy a new (which to me usually means used) car this year. I am confused about all the offers currently around. I understand there’s a tax deduction for new car purchases, which basically makes the purchase “tax free.” I’m considering purchasing a new car to take advantage of the tax benefits, but also realize that a used car might still make more financial sense. Are hybrid tax benefits still around? The sub $20,000 Honda Insight is looking quite appealing… Alex, San Diego, CA

Answer: The credit is only for new cars. The hybrid tax benefits still exist. They’re available for four kinds of vehicles: fuel cell, advanced lean burn technology, hybrid, and alternative fuel. That’s the good news.

The bad news–aarrrgggghhhhh–is that rules are stunningly complex. I know I shouldn’t be surprised at this point, but it’s ridiculous. No, it’s stupid. For instance, the credit varies significantly by car. According to tables published by Cars.com, the tax credit attached to the 2009 BMW 335d is $900 while the credit on a 2009 Ford Escape Hybrid is $3,000 (for the two-wheel drive version). The credit also runs out. There is a limit of 60,000 cars per automaker, and then the credits are phased out. As I understand it you already can’t get a claim the full credit (or even get a credit) on Toyota and Honda alternative cars. For the life of me I can’t figure out how all these tax credit twists-and-turns, phase-ins and phase-outs are good public policy.

You’re right about the ability to deduct state and local taxes on a new car purchase. (Again, not for used cars.) Of course, there are wrinkles to this tax perk. You can deduct local sales and state taxes on a new car purchase if you file jointly and make less than $250,000 or if you earn less than $125,000 for a single filer. The car, motorcycle, RV or light truck must cost less than $49,500.

You can read a good explanation of the rules at Cars.com The hybrid tax credit section is here.

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