Tax Credit for Hybrid, Electric and Alternative Fuel Vehicles

Save up to $4,000 in Taxes with the Alternative Motor Vehicle Tax Credit

Man charging an electric car
David Leahy/ Iconica/ Getty Images

Individuals and businesses who buy a brand new hybrid, electric or diesel fuel vehicle can take advantage of the "Alternative Motor Vehicle Credit." This tax credit applies to new cars and trucks that are certified for the credit by the IRS.

 

Alternative Motor Vehicle Tax Credit

Qualifying vehicles purchased on or after January 1, 2006, will be eligible for a tax credit ranging from $400 to $4,000 based on fuel economy.

The alternative motor vehicle tax credit is actually a combination of two separate tax credits. The math is complicated, and fortunately you won't have to calculate it. The car manufacturers and the IRS will certify the tax credit amount of qualifying vehicles.

 

Phaseout of the Alternative Motor Vehicle Tax Credit

The alternative motor vehicle tax credit may be short-lived, depending on consumer demand for the new cars powered by fuel-efficient hybrid, electric, and clean diesel motors. Most of the cars certified for the credit are hybrid cars. But the credit is also available for electric vehicles and diesel cars using advanced lean-burn technology. The dollar value of the tax credit will start to be reduced once a manufacturer sells 60,000 qualifying vehicles. The phaseout occurs at the manufacturer level. So popular brands may see their tax credits reduced sooner than less popular brands.

Here are the time periods and dollar amounts for alternative motor vehicle tax credit.

"Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter." -- From the IRS

 

How Will You Know What the Tax Credit Amount Is?

The IRS has certified various makes and models for the hybrid credit. These certifications indicate the maximum dollar value that your tax credit will be. Your alternative motor vehicle tax credit may be reduced by various limitations.

Under guidance released by the IRS, car manufacturers can issue you a written certification specifying the dollar amount of your hybrid tax credit. The IRS mandates that the manufacturer's certification must have the following sixteen elements:

  1. Name, address, and tax identification number of the manufacturer,
  2. Make, model, model year, and other vehicle identification information,
  3. A statement that the vehicle was made by the manufacturer,
  4. The type of credit for which the vehicle qualifies,
  5. The dollar amount of the tax credit (showing all computations),
  6. The gross vehicle weight rating of the vehicle,
  7. The vehicle inertia weight class of the vehicle,
  8. The city fuel economy of the vehicle,
  9. Statement that the vehicle complies with the provisions of the Clean Air Act,
  10. Copy of the certificate that the vehicle meets emission standards under the Clean Air Act,
  11. Statement that the vehicle complies with state air quality control laws.
  1. Statement that the vehicle complies with certain motor vehicle safety provisions,
  2. Statement that the vehicle uses hybrid technology (both internal combustion and a rechargeable energy storage system),
  3. Statement that the vehicle meets or exceeds California low emissions vehicle standards,
  4. Evidence that the vehicle does not exceed maximum power standards.
  5. Perjury statement as follows: "Under penalties of perjury, I declare that I have examined this certification, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this certification are true, correct, and complete."

I suspect this will be one long tax document. You should keep this tax certification for at least four years.

 

How to Qualify for the Alternative Motor Vehicle Tax Credit?

There are three criteria to qualify for the hybrid tax credit:

  1. Purchase a qualifying vehicle.
  2. Purchase the vehicle new, not used.
  3. The vehicle must be used for your own personal or business use. The vehicle should not be bought with the intention of re-selling it.

Actually, there are seven criteria for being eligible for the hybrid tax credit, but these are the three criteria that you can actually control. The other criteria relate to the fuel economy and energy efficiency of the vehicle. These other criteria are reviewed by the IRS when they certify a particular vehicle for the alternative motor vehicle tax credit.

You must purchase a qualifying vehicle, and the qualifying vehicle must be "placed in service" in during the tax year for which you claim the tax credit. Placed in service means when you actually take possession of the vehicle, according to Mark Luscombe, JD, CPA and principal federal tax analyst for CCH. You must take delivery of the vehicle on or after January 1, 2006.

Table of Contents
Alternative Motor Vehicle Tax Credit: Basic Info and Qualifications (page 1)
Alternative Motor Vehicle Tax Credit: Limitations, No Carryover, Tax Strategies (page 2)
List of All Vehicles Eligible for the Alternative Motor Vehicle Tax Credit (page 3)
Phaseout Time Periods and Dollar Amounts (page 4)

Limitations on the Alternative Motor Vehicle Tax Credit

The alternative motor vehicle tax credit is a non-refundable tax credit. The credit will reduce your regular income tax liability, but not below zero. The credit will not reduce your alternative minimum tax, if that applies to you.

Change for 2008 only: the AMT patch provided as part of the Emergency Economic Stabilization Act allows otherwise nonrefundable personal credits to offset the AMT for 2008.

If you are eligible for multiple tax credits, there are special ordering rules for which credit to take first. The alternative motor vehicle tax credit is taken last after all the following credits take been taken into full account:

So the formula for your maximum alternative motor vehicle tax credit is as follows:

Regular income tax liability
minus the total of these other tax credits
minus the tentative minimum tax calculated under the AMT rules.

For 2008, the AMT patch mentioned above allows you to use the alternative motor vehicle credit to offset any AMT liabilities. The credit would thus be limited to your regular income tax, plus the AMT, minus other tax credits.

 

No Carryover

Any tax liability left over by these reductions will be the maximum dollar limit of your alternative motor vehicle tax credit. If your hybrid tax credit exceeds your maximum dollar limit, the excess is not refundable, and is lost forever. The excess cannot be carried over to another year, or given away to another person.

 

Tax Strategies for the Limitations on the Hybrid Tax Credit

If you cannot use all your hybrid tax credit, I have some good news for you. It might be possible to have a family member purchase the car for you. The key is following the law, and making sure that the person who buys the car has enough tax liability to take full advantage of the hybrid tax credit.

The law forbids taxpayers from buying a new hybrid vehicle with the intention of reselling the car. The taxpayer must purchase the hybrid car or truck with the firm intention of using the vehicle personally. Therefore, I would caution against re-selling the car or giving the car as a gift. Here's what I suggest you do instead.

The taxpayer with the highest regular tax liability should purchase a qualifying alternative fuel car or truck. The taxpayer would be the owner of the car, would register the car in his or her own name, and would be responsible for insurance, maintenance, and other car ownership responsibilities. But the taxpayer would allow you to use the car, as needed, for free.

For example, Sarah wants to buy a new hybrid car, but she can use only $1,500 of the estimated $3,000 alternative motor vehicle tax credit. Her brother Steven has a substantial tax liability and can take advantage of the full amount of the alternative motor vehicle tax credit.

Steven should purchase the hybrid car for his own personal use, but allow Sarah to borrow the car as she needs it. Under no circumstances should Steven sell or give the car to Sarah.

The tax law might allow a taxpayer to lease a qualifying vehicle. The lease would have to be for a period of time not less than the "entire economic life of the vehicle." For example, Steven (from the example above) might write up a lease contract in which he leases to Sarah the hybrid car "for the entire economic life of the vehicle." Under such a long-term lease agreement, Steven would retain full ownership of the hybrid car, and Sarah would only be leasing it. However (and this is a big however), I would caution you to wait until the IRS releases regulations to interpret this new tax law before entering into such an arrangement, just to make sure you are fully eligible to take advantage of the alternative motor vehicle tax credit.

When I suggested this strategy to CCH federal tax analyst Mark Luscombe, he responded, "Maybe we will just have to wait for the [IRS] regulations to clarify this." I agree. (Note: last I checked, the IRS has not issued regulations for the alternative motor vehicle credit.)

 

Recapture: Penalty for Selling Your Hybrid Car Early

The new law for the alternative motor vehicle tax credit requires taxpayers to recapture their hybrid tax credit if they re-sell their hybrid car or truck. Further details will be provided by the IRS when they issue regulations to interpret and implement this new tax law. For now, I would advise against selling, leasing, or giving hybrid cars away until we find out how long you have to keep the car.

 

Small Businesses Can Use the Hybrid Tax Credit

The hybrid tax credit is available to both individuals and businesses, including self-employed people. Business owners are accustomed to depreciating their business assets, and sometimes taking a Section 179 deduction to expense some or all of their assets in the first year of use.

The cost basis of a hybrid car must be reduced by the allowable amount of the hybrid tax credit. After cost basis is reduced, the remaining basis can be depreciated or expensed as a Section 179 deduction.

Table of Contents
Alternative Motor Vehicle Tax Credit: Basic Info and Qualifications (page 1)
List of All Vehicles Eligible for the Alternative Motor Vehicle Tax Credit (page 3)
Phaseout Time Periods and Dollar Amounts (page 4)

The Internal Revenue Service has certified several vehicles as eligible for the alternative motor vehicle tax credit. This tax credit is available for purchasing fuel-efficient hybrid, electric, and diesel cars and trucks. The IRS has certified the maximum hybrid tax credit for the following vehicles:

  • Qualifying Vehicles with No Model Year Indicated

  • Mercedes GL 320 Bluetec: $1,800
  • Mercedes ML 320 Bluetec: $900
  • Mercedes R 320 Bluetec: $1,550

    2009 Qualifying Vehicles

  • 2009 Ford Escape Hybrid 2WD: $3,000
  • 2009 Ford Escape Hybrid 4WD: $1,950
  • 2009 Mercury Mariner Hybrid 2WD: $3,000
  • 2009 Mercury Mariner Hybrid 4WD: $1,950
  • 2009 Volkswagen Jetta 2.0L TDI sedan: $1,300
  • 2009 Volkswagen Jetta 2.0L TDI SportWagen: $1,300

    2008 Hybrid Models

  • 2008 Chevrolet Malibu Hybrid: $1,300
  • 2008 Chevrolet Tahoe Hybrid (2WD and 4WD): $2,200
  • 2008 Ford Escape 2WD Hybrid: $3,000
  • 2008 Ford Escape 4WD Hybrid: $2,200
  • 2008 GMC Yukon Hybrid (2WD and 4WD): $2,200
  • 2008 Honda Civic GX compressed natural gas vehicle: $4,000
  • 2008 Honda Civic Hybrid CVT: $2,100
  • 2008 Lexus LS 600h L Hybrid: $450
  • 2008 Lexus RX 400h 2WD and 4WD: $550
  • 2008 Mazda Tribute 2WD Hybrid: $3,000
  • 2008 Mazda Tribute 4WD Hybrid: $2,200
  • 2008 Mercury Mariner 2WD Hybrid: $3,000
  • 2008 Mercury Mariner 4WD Hybrid: $2,200
  • 2008 Nissan Altima Hybrid: $2,350
  • 2008 Saturn Aura Hybrid: $1,300
  • 2008 Saturn Vue Green Line: $1,550
  • 2008 Toyota Camry Hybrid: $650
  • 2008 Toyota Highlander Hybrid 4WD: $650
  • 2008 Toyota Prius: $787.50

    2007 Hybrid Models

  • 2007 Chevrolet Silverado (2WD): $250
  • 2007 Chevrolet Silverado (4WD): $650
  • 2007 Ford Escape 4 WD Hybrid: $1,950
  • 2007 Ford Escape Front WD Hybrid: $2,600
  • 2007 GMC Sierra (2WD): $250
  • 2007 GMC Sierra (4WD): $650
  • 2007 Honda Accord Hybrid AT: $1,300
  • 2007 Honda Accord Hybrid Navi AT: $1,300
  • 2007 Honda Civic GX compressed natural gas vehicle: $4,000
  • 2007 Honda Civic Hybrid CVT: $2,100
  • 2007 Lexus GS 450h: $1,550
  • 2007 Lexus RX 400h 2WD and 4WD: $2,200
  • 2007 Mercury Mariner 4 WD Hybrid: $1,950
  • 2007 Nissan Altima Hybrid: $2,350
  • 2007 Saturn Aura Green Line: $1,300
  • 2007 Saturn Vue Green Line: $650
  • 2007 Toyota Camry Hybrid: $2,600
  • 2007 Toyota Highlander Hybrid 2WD and 4WD: $2,600
  • 2007 Toyota Prius: $3,150

    2006 Hybrid Models

  • 2006 Chevrolet Silverado (2WD): $250
  • 2006 Chevrolet Silverado (4WD): $650
  • 2006 Ford Escape Hybrid 4 WD: $1,950
  • 2006 Ford Escape Hybrid Front WD: $2,600
  • 2006 GMC Sierra (2WD): $250
  • 2006 GMC Sierra (4WD): $650
  • 2006 Honda Accord Hybrid AT: $1,300 (without updated control calibration qualifies for a credit amount of $650)
  • 2006 Honda Civic GX compressed natural gas vehicle: $4,000
  • 2006 Honda Civic Hybrid CVT: $2,100
  • 2006 Honda Insight CVT: $1,450
  • 2006 Lexus RX400h 2WD: $2,200
  • 2006 Lexus RX400h 4WD: $2,200
  • 2006 Mercury Mariner Hybrid 4 WD: $1,950

    2006 Hybrid Models

  • 2006 Toyota Highlander 2WD Hybrid: $2,600
  • 2006 Toyota Highlander 4WD Hybrid: $2,600
  • 2006 Toyota Prius: $3,150

    2005 Hybrid Models

  • 2005 Ford Escape 2WD Hybrid: $2,600
  • 2005 Ford Escape 4WD Hybrid: $1,950
  • 2005 Honda Accord Hybrid AT: $650
  • 2005 Honda Civic GX compressed natural gas vehicle: $4,000
  • 2005 Honda Civic Hybrid (SULEV) CVT: $1,700
  • 2005 Honda Civic Hybrid (SULEV) MT: $1,700
  • 2005 Honda Insight CVT: $1,450
  • 2005 Toyota Prius: $3,150

You will notice that several 2005 models are certified for the hybrid tax credit. If you bought a 2005 hybrid on or before December 31, 2005, you qualify for the clean fuel deduction, but not for the new hybrid credit. However, if you bought a 2005 hybrid on or after January 1, 2006, you will qualify for the new hybrid credit but not for the old clean fuel deduction.

Table of Contents
Alternative Motor Vehicle Tax Credit: Basic Info and Qualifications (page 1)
Alternative Motor Vehicle Tax Credit: Limitations, No Carryover, Tax Strategies (page 2)
List of All Vehicles Eligible for the Alternative Motor Vehicle (page 3)
Phaseout Time Periods and Dollar Amounts (page 4)

The alternative motor vehicle tax credit will begin to phase out once a manufacturer sells more than 60,000 qualifying vehicles.

"Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter." -- From the IRS

Based on sales data, the IRS has set phaseout periods for the following vehicles.

Phaseout for Ford and Mercury hybrid vehicles

Begins: April 1, 2009.
100% credit: for eligible vehicles purchased before April 1, 2009.
50% credit: for eligible vehicles purchased between April 1, 2009, and September 30, 2009.
25% credit: for eligible vehicles purchased between October 1, 2009, and March 31, 2010.
0% credit: for vehicles purchased April 1, 2010, or later.

Here are the 50% credit amounts for Ford and Mercury vehicles purchased from April 1, 2009, and September 30, 2009:

  • 2005, 2006, 2007 Ford Escape 2WD: $1,300
  • 2008, 2009 Ford Escape 2WD: $1,500
  • 2005, 2006, 2007, 2009 Ford Escape 4WD: $975
  • 2008 Ford Escape 4WD: $1,100
  • 2010 Ford Fusion: $1,700
  • 2008, 2009 Mercury Mariner 2WD: $1,500
  • 2006, 2007, 2009 Mercury Mariner 4WD: $975
  • 2008 Mercury Mariner 4WD: $1,100
  • 2010 Mercury Milan: $1,700

Here are the 25% credit amounts for Ford and Mercury vehicles purchased from October 1, 2009, and March 31, 2010:

  • 2005, 2006, 2007 Ford Escape 2WD: $650
  • 2008, 2009 Ford Escape 2WD: $750
  • 2005, 2006, 2007, 2009 Ford Escape 4WD: $487.50
  • 2008 Ford Escape 4WD: $550
  • 2010 Ford Fusion: $850
  • 2008, 2009 Mercury Mariner 2WD: $750
  • 2006, 2007, 2009 Mercury Mariner 4WD: $487.50
  • 2008 Mercury Mariner 4WD: $550
  • 2010 Mercury Milan: $850

     

    Phaseout for Honda hybrid vehicles

    Begins: January 1, 2008.
    100% credit: for eligible vehicles purchased before January 1, 2008.
    50% credit: for eligible vehicles purchased between January 1, 2008, and June 30, 2008.
    25% credit: for eligible vehicles purchased between July 1, 2008, and December 31, 2008.
    0% credit: for vehicles purchased January 1, 2009, or later.

     

    Phased-out hybrid tax credit dollar amounts for Honda hybrids

    Here are the 50% credit amounts for January 1, 2008, through June 30, 2008:

    • 2007 Honda Accord Hybrid AT: $650
    • 2007 Honda Accord Hybrid Navi AT: $650
    • 2007 Honda Civic Hybrid CVT: $1,050
    • 2008 Honda Civic Hybrid CVT: $1,050

    Here are the 25% credit amounts for July 1, 2008, through December 31, 2008:

    • 2007 Honda Accord Hybrid AT: $325
    • 2007 Honda Accord Hybrid Navi AT: $325
    • 2007 Honda Civic Hybrid CVT: $525
    • 2008 Honda Civic Hybrid CVT: $525

    Phaseout for Toyota and Lexus hybrid vehicles

    Begins: October 1, 2006.
    100% credit: for eligible vehicles purchased before October 1, 2006.
    50% credit: for eligible vehicles purchased between October 1, 2006 and March 31, 2007.
    25% credit: for eligible vehicles purchased between April 1, 2007 and September 30, 2007.
    0% credit: for vehicles purchased October 1, 2007, or later.

     

    Phased-out hybrid tax credit dollar amounts for Toyota and Lexus hybrid vehicles

    Here are the 50% credit amounts for October 1, 2006 through March 31, 2007:

    • 2005 Prius: $1,575
    • 2006 Highlander 4WD Hybrid: $1,300
    • 2006 Highlander 2WD Hybrid: $1,300
    • 2006 Lexus RX400h 2WD: $1,100
    • 2006 Lexus RX400h 4WD: $1,100
    • 2006 Prius: $1,575
    • 2007 Camry Hybrid: $1,300
    • 2007 Lexus GS 450h: $775
    • 2007 Lexus RX 400h: $1,100
    • 2007 Toyota Highlander Hybrid: $1,300
    • 2007 Toyota Prius: $1,575

    Here are the 25% credit amounts for April 1, 2007 through September 30, 2007:

    • 2005 Prius: $787.50
    • 2006 Highlander 4WD Hybrid: $650
    • 2006 Highlander 2WD Hybrid: $650
    • 2006 Lexus RX400h 2WD: $550
    • 2006 Lexus RX400h 4WD: $550
    • 2006 Prius: $787.50
    • 2007 Camry Hybrid: $650
    • 2007 Lexus GS 450h: $387.50
    • 2007 Lexus RX 400h: $550
    • 2007 Toyota Highlander Hybrid: $650
    • 2007 Toyota Prius: $787.50
    • 2008 Lexus LS 600h L Hybrid: $450
    • 2008 Lexus RX 400h 2WD and 4WD: $550
    • 2008 Toyota Camry Hybrid: $650
    • 2008 Toyota Highlander Hybrid 4WD: $650
    • 2008 Toyota Prius: $787.50

     

    Table of Contents
    Alternative Motor Vehicle Tax Credit: Basic Info and Qualifications (page 1)
    Alternative Motor Vehicle Tax Credit: Limitations, No Carryover, Tax Strategies (page 2)
    List of All Vehicles Eligible for the Alternative Motor Vehicle Tax Credit (page 3)
    Phaseout Time Periods and Dollar Amounts (page 4)