The hybrid car tax deduction enables owners of a hybrid vehicle – that is cars that have a gasoline-powered engine and an electric motor -- to claim a one-time tax relief on their federal income tax returns. This deduction, which has been provided under the Working Families Tax Relief Act of 2004, is a one-time deal.
The deduction can be availed by those car owners who bought their cars in 2004 and 2005. The deduction limit for these two years is a handsome $2,000. However, the law provides for a paltry $500 deduction for hybrid cars that are to be bought in 2006, and no further benefit after that.
Fortunately, a revised energy bill that was signed in August 2005, gives hybrid cars even more lucrative incentives. The incentives that will come into effect from January 1, 2006 will supersede the limitations of the 2004 law. Instead of tax deduction, the new incentives will provide for full dollar tax credits, something that the taxpayers should like.
They should now postpone the purchase of their hybrid vehicle to 2006, and avail the tax credits. However, this tax credit will be available only on the first 60,000 hybrids sold by the carmaker. So, if you are going in for a popular category such as Honda or Toyota, you mustn’t hold up for too long.
Under the existing law, the value of the tax break depends on the tax bracket you fall into because it is a tax deduction. Those who have purchased hybrid vehicles in 2004 and 2005 can clam a $2000 reduction on their 2004 or 2005 tax returns. This means that if you are in the 33% tax bracket, the deduction will lower your tax bill by $600, while if you are in the 15% tax bracket, you will save up to $300.
The hybrid vehicles that have been on road prior to 2004 can also claim tax reduction. To do so, the owners must modify the tax return that was filed to claim a reimbursement within three years after the initial return date or within two years after the tax was paid.
Claiming your tax deduction is relatively simple; you do not have to itemize the deduction in order to claim it, but you must use Form 1040. Your deduction should be documented underneath the form and be classified as ‘Clean Fuel’.
