Under the Energy Policy Act of 2005, the tax credit you get depends on the type of vehicle you buy. But a few rules apply to all hybrids and AFVs:
- You must be the original owner of the car. A used car doesn't count.
- You must buy the car to use it -- not to resell it. (Otherwise people could just flip cars for the tax credit.)
- The car must be used in the U.S.
- You need to buy and start using the car between Jan. 1, 2005, and Dec. 31, 2010. (That means that if you bought a hybrid or AFV a while ago and never claimed the credit, you can file an amended tax return and maybe get a refund.)
- You need to submit IRS form 8910.
If you buy an AFV and meet the criteria above, you qualify for a $4,000 tax credit [source: EPA]. If you have an AFV that you bought and started using before Jan. 1, 2005, you still may be able to get a $2,000 tax deduction [source: EPA].
Hybrid tax credits and other incentives are a little more difficult to calculate. That's because the government not only wants you to buy hybrids, but also wants to encourage carmakers to produce them. After a company has sold 60,000 hybrid models, the tax credits start to phase out. That means that if you're considering a hybrid, it may pay to go with a carmaker that's new to the hybrid game. Right now the only carmakers that have had the phase-outs begin on their vehicles are Honda and Toyota.
The tax credits for buying a hybrid aren't as great as for AFVs. That's because hybrids still use gas -- they just don't use as much as regular cars. Hybrid tax credits are also based on how fuel-efficient the hybrid is. For example, a two-wheel drive Ford Escape Hybrid gets a larger credit than a four-wheel drive Ford Escape Hybrid because the four-wheel drive system adds weight, which increases the car's gas consumption.
While hybrids that meet the criteria above are eligible for a tax credit of up to $3,400, most aren't efficient enough to qualify for the full amount (the Toyota Prius comes the closest, qualifying for a $3,150 tax credit). What they do qualify for varies by model. The Environmental Protection Agency (EPA) has a list of models that qualify and the amount each qualifies for [source: EPA]. If you bought a hybrid and put it into service before Jan.1, 2005, you can still qualify for a $2,000 tax deduction [source: EPA].
To learn more about AFVs, hybrid cars and different types of taxes, look over the links below.
Related HowStuffWorks Articles
More Great Links
- Environmental Protection Agency Fuel Efficient Vehicle Tax Incentives Information Center. http://www.fueleconomy.gov/feg/taxcenter.shtml
- Epstein, Lita "Green Tax Guide: Buy a Hybrid Car or AFV and Save on Taxes." Green Daily.com, January 24, 2008.
- Internal Revenue Service. Hybrid Cars and Alternative Fuel Vehicles. http://www.irs.gov/newsroom/article/0,,id=157632,00.html
- U.S. Department of Energy. "Energy Policy Act of 2005: What the Energy Bill Means for You." http://www.doe.gov/taxbreaks.htm