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Hybrid Rebate for 2006 Tax Credit for Hybrid Cars

You may be preparing your 2005 tax return now so it's a good time to start thinking about what you can do to save on your 2006 taxes. If you happen to be in the market for a new car you should know about the new Hybrid Rebate (tax credit) that’s available for new cars placed in service after December 31, 2005. This Hybrid Rebate is different and takes the place of the Hybrid tax deduction that was available for purchases made before December 31, 2005. That tax deduction could only reduce you taxable income by $2,000.

How the Hybrid Rebate works:

If you purchase a qualified hybrid motor vehicle after December 31, 2005 you may take the credit. The Internal Revenue Service specifies that the full credit is only available for the first 60,000 vehicles sold through each auto manufacturer. After that, the amount of the credit will be phased out over the subsequent 5 quarters. The program will completely cease by December 31, 2010, regardless of the number of vehicles sold but chances are the program will be phased out earlier because the manufactures will have sold enough vehicles to use their allowance. For example, Toyota, which has the best selling Prius hybrid, projects that it will attain the 60,000 mark in the first half of 2006.

Buyers of hybrid vehicles are eligible for tax credits ranging from $250 to $3,400, which vary according to a vehicle's fuel economy and weight. With the new credits you can potentially save much more money than the old $2,000 tax deduction. That of course is because tax credits are more valuable than simple tax deductions.

You may ask what is a qualified hybrid motor vehicle? Below is a list of some of the qualified hybrid vehicles and the credit associated with the vehicles.

Make and Model Credit
2006 Ford Escape Hybrid (2X4) $2,600*
2006 Ford Escape Hybrid (4X4) $1,950*
2006 Mercury Mariner Hybrid (4X4) $1,950*
2006 Insight (auto trans. only) $1,450*
2005-06 Accord Hybrid $650*
2005 Civic Hybrid $1,700*
2006 Civic Hybrid $2,100*
* Based on manufacturer's estimate;must have IRS certification.

More vehicles will be qualified by the IRS. Under IRS guidance the certification of a vehicle's qualified incremental hybrid cost is made by the manufacturer. This guidance will specify procedures and methods for calculating fuel economy savings and incremental hybrid costs.

In addition to being placed in service after December 31, 2005 there are a few other requirements in order to claim the credit. It must be a new vehicle and use of it must commence with the taxpayer. It can not be acquired for resale and it must be used mainly in the United States.

Although not solar powered, Hybrid cars are built to limit pollution through low fuel emissions. The vehicles are primarily gas powered cars, light trucks and suvs with electrical motor assist that have bodies designed with the latest aerodynamics.

Hybrids are economical when it comes to gas mileage but it generally will take years to recover the difference between the initial cost and the fuel pump savings even if you include the new Hybrid Rebate. They can be cheaper to run but they have the added benefit of being environmentally friendly. Right now, Hybrid’s are hot and the 2006 Hybrid Rebate will surely add to their popularity. They are currently viewed as the most fuel efficient and least polluting vehicles on the road.

The Hybrid Rebate or credit is an incentive provided by Congress to promote the sale and use of Hybrid vehicles. Because they help the environment by reducing fuel emissions and reducing dependency on a finite supply of fossil fuel they can be viewed as an environmentalist’s car. However Hybrid’s are not just for people interested in environmental issues. With the increasing price of gas, Hybrid vehicles may be the wave of the future and if they are that will help reduce the US dependency on foreign oil.

Jim Prescott, CPA business consultant for over 30 years specializing in small and medium size businesses that range from closely held to publicly traded companies. Jim is a Partner in CPA firm Prescott Chatellier Fontaine & Wilkinson, LLP that offers audit, accounting, investment advice, tax planning services, estate plans, pension plans consulting and insurance advice. In addition to the CPA firm's web site Prescott Chatellier Fontaine & Wilkinson, LLP you can find more information and Articles on Retirement and Tax Planning at Plan-2 Retire