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Diane Kennedy's Blog

Tax Credits on Hybrids Slowly Going Away

Written by Diane Kennedy, CPA on April 18, 2009

There are all kinds of great reasons to buy a hybrid vehicle. Besides the increased gas mileage and green-conscious consumption though, there’s also been a tax incentive, in the form of a tax credit (not a deduction – a credit – it’s better). Sadly, that’s going away.

As part of the carrot to entice people to embrace (and pay more) for hybrid technology, thousands of people have been able to take a tax credit of up to $3,000 in the year they purchased their hybrid vehicle. The reason a tax credit is so much better than a tax deduction is that where a tax deduction reduces the amount of income you calculate tax on, a tax credit goes right to the bottom line and reduces the tax itself. Both will save you money, no question – but credits are definitely the more powerful of the two.

In any event, when the federal government introduced the tax credit for hybrids they put a sunset provision on it that was linked to the number of vehicles sold. Once the sales numbers for any particular manufacturer hit 60,000, the credit for that manufacturer phased out entirely over the next year.

Toyota was first to go. Not surprising – have you noticed that the Prius seems to be everywhere? Honda was next. Now, the IRS has just announced that the sunset provisions for Ford have begun. Ford hit the 60,000 vehicle mark in the last quarter of 2008.

Beginning on April 1, 2009 (through September 30th), you can can still take a tax credit on a purchase or a leased Ford hybrid vehicle, but only for 50% of what you were entitled to if you’d bought your vehicle before April 1st. For vehicles bought or leased from October 1, 2009-March 31, 2010, the credit is reduced to just 25% of the original amount, and after April 1, 2010, no credit is available at all.

I’m sad to see the credits go. Hybrids tend to cost more, and the credit has been helpful when offsetting that extra purchase price. I don’t know if the existence of the credit was a major factor influencing consumer buying decisions, or vehicle manufacturing development … heck, I don’t know if we need incentives to purchase and demand fuel-efficient technology. But it was a nice treat while it lasted.

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