The new energy law cuts the price of a hybrid car with a tax credit of up to $3,400 -- but some buyers will miss their chance.
By MSN Money staff
The government just made hybrid cars a lot more attractive by greatly expanding tax incentives. Then it made sure not everybody could use them.
In the energy bill that President Bush signed into law in August, gasoline-electric vehicles qualify for a tax credit -- a dollar-for-dollar reduction in your taxes, way better than a deduction -- of up to $3,400. That's about four times the tax break that current buyers get on hot sellers such as the Toyota Prius and Ford Escape Hybrid, and it covers the typical difference in sticker price between standard and hybrid models.
The law isn't just about hybrids, of course. The new law funnels billions of dollars through tax breaks and loan guarantees for new nuclear power plants, clean coal technology and wind energy. It sets federal standards for power grid reliability, to prevent the kind of power blackouts that struck the Midwest and Northeast in 2003. It rewards homeowners who make conservation improvements. It extends daylight-saving time by a month, beginning in 2007.
But the most visible aspect of the law, day to day, may be the increased number of hybrid-electric cars it helps to put on the road. If youre in the market for a car, this bill will help you save up to $3,500 on a fuel-efficient hybrid or clean-diesel vehicle, Bush said at the signing ceremony in New Mexico.
But, as they say on TV, supplies are limited. Buyers of the most popular hybrid models will have to act quickly to take advantage.
Each automaker can sell just 60,000 vehicles that qualify for the credit. Thats 60,000 vehicles total, not each year. Toyota will sell twice that many Priuses in 2005 alone. Once those sales are gone (and a short phase-out is over), buyers will have to do without the incentive or look to another manufacturer.
In short, if youre in the market for a hybrid, especially from Toyota, get in line Jan. 1, 2006, the day the new law kicks in. Theres already a waiting list for its three hybrids (the Prius, the Highlander SUV and Lexus 400h SUV). At current sales rates, Ford and Honda also would run out of qualifying credits well before the law expires at the end of 2009.
The provision is meant to spur other, less leading-edge automakers into action. There are other catches as well:
Calculations of the credit are complex. The amount of the credit is tied to how much mileage is improved over a similar, non-hybrid vehicle, both in EPA estimates and over the lifetime of the car. No one's sure yet what each model's credit will be, but they have guesses.
The Union of Concerned Scientists estimates that the best seller, the Prius, whose EPA ratings double those of the similarly sized Camry, would see a credit of about $1,700. Toyota says the credit would be higher, $2,400 to $3,000. The American Council for an Energy Efficient Economy guesses $3,150. It also ran the numbers on other models, calculating tax credits for the Ford Escape Hybrid at $2,600, the Honda Accord Hybrid at $650 and the Chevrolet/GMC hybrid full-size pickup at $250.
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The lifetime fuel savings component -- called a "conservation credit" -- is meant to favor larger, heavier vehicles where initial savings aren't as dramatic but the amount of gasoline consumed is much greater. Any vehicle that saves 1,200 gallons of gas over its lifetime compared with its benchmark gets a $250 credit, plus $250 for each additional 600 gallons saved.
The car might qualify for the credit, but you might not. Unless Congress changes the Alternative Minimum Tax, it's likely that much of the audience for these expensive fuel-sippers (the cheapest is $20,000) may not be able to reap the benefit of the credit. Too many deductions or credits trigger the AMT, which was introduced in 1969 to ensure that the rich didn't deduct their way out of paying their fair share. But as many as 30 million Americans could fall under AMT provisions by 2010, says Nina Olsen, the national taxpayer advocate. (Read more about what our tax expert calls the "Awfully Mean Tax.")
Many states offer their own incentives for hybrids, from tax credits to use of carpool lanes. To see what your state offers, check out this list compiled by the Union of Concerned Scientists.
The car might get 60 mpg but not qualify for the credit. Some high-mileage cars such as diesels meet the intent of the law but don't offer clean enough tailpipe emissions to qualify. Some hybrids don't, either.
Diesel, fuel cell, E85 and credits, too
Hybrid cars will share the tax fast lane with a number of other fuel-saving technologies:
- "Clean diesels" that burn the low-sulfur fuel mandated in 2006 and that meet air-quality standards can qualify for up to $3,400 in credits.
- Fuel-cell-powered passenger vehicles qualify for a base credit of $8,000, with trucks and buses qualifying for credits as large as $40,000. But there aren't any fuel-cell passenger cars for sale; only a few are in limited testing.
- Vehicles powered by compressed or liquefied natural gas, hydrogen or any liquid fuel that's at least 85% methanol (E85) qualify based on a complex formula pegged to cost, weight, emissions and fuel efficiency. Qualifying cars and trucks cannot operate on gasoline or diesel, and the credit is available through 2010.
- Electric cars would see an extension of the current tax credit, up to $4,000.
Despite the nearly $1 billion that will be expended over the next decade on alternative-fuel and hybrid incentives, Congress so far has refused to raise fuel economy standards.
Tax breaks for oil, coal and natural gas companies total about $5.5 billion.
Credits for your home, too
Taxpayers can claim credits totaling $500 in 2006 and 2007 for upgrading their heating systems, insulation, windows, doors and thermostats, or for caulking leaks, installing pigmented metal roofs and otherwise cutting energy waste.
Write-offs for replacement windows are capped at $200, however, while the credit for high-efficiency central air-conditioning, heat pumps and water heaters is capped at $300.
Homeowners who install solar-energy systems can claim a tax credit of up to $2,000 as long as the system isn't used to heat swimming pools and hot tubs. Smaller credits are available for fuel cell and photovoltaic power sources.
Credits are a dollar-for-dollar reduction in your taxes, compared with deductions, which only reduce your taxable income. The current $2,000 deduction on gasoline-electric hybrid purchases cuts your tax bill by about $700 at most -- and the deduction was scheduled to drop to $500 in 2006.
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