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Collect a Double Tax Break for Fuel Efficient Cars


 Hurry if You Want Certain Models

The high price of gas has caused many people to consider buying more fuel-efficient vehicles. In addition to spending less time at the pump, these vehicles may also qualify for a generous tax break. Several new federal income tax credits kicked in this year for buying new fuel-efficient vehicles. 

DOUBLE TAX BREAK: Use a Home Equity Loan to Generate More Savings

     If you qualify for either the hybrid or alternative fuel credit, you may be able to gain additional
tax savings by financing your new vehicle purchase with a home equity loan.
     You can generally claim a deduction for the interest on up to $100,000 of home equity loan principal. Unless you are subject to the alternative minimum tax (AMT), it doesn’t matter how you spend the loan proceeds.
     So using the money to buy a new vehicle that generates a tax credit won’t negate your rightful home equity loan interest deduction. Of course,
you must compare the interest rate charged on a home equity loan to what you would have under other borrowing alternatives.
     Warning: The home equity loan strategy won’t deliver the expected federal income tax write-offs if you’re liable for the AMT. Reason: Under the AMT rules, you can only deduct home equity loan interest when you spend the proceeds to acquire, build, or improve your primary residence or a second home that you use as a personal residence. (Internal Revenue Code Sections 56(e) and 163(h))

Qualifying Ford and Mercury  
2006 Ford Escape Hybrid 2WD $2,600
2006 Ford Escape Hybrid 4WD   1,950
2007 Ford Escape Hybrid 2WD   2,600
2007 Ford Escape Hybrid 4WD   1,950
2006 Mercury Mariner Hybrid 4WD   1,950
2007 Mercury Mariner Hybrid 4WD   1,950

Qualifying Chevy, GMC and Saturn

2006 Chevy Silverado Hybrid Pickup 2WD $   250
2006 Chevy Silverado Hybrid Pickup 4WD      650
2007 Chevy Silverado Hybrid Pickup 2WD      250

2007 Chevy Silverado Hybrid Pickup 4WD

2006 GMC Sierra Hybrid Pickup 2WD      250
2006 GMC Sierra Hybrid Pickup 4WD      650
2007 GMC Sierra Hybrid Pickup 2WD      250
2007 GMC Sierra Hybrid Pickup 4WD      650
2007 Saturn Vue Green Line      650
Qualifying Toyota and Lexus  
2005 Toyota Prius      $3,150
2006 Toyota Prius   3,150
2006 Toyota Highlander Hybrid 2WD   2,600
2006 Toyota Highlander Hybrid 4WD   2,600
2007 Toyota Camry Hybrid   2,600
2006 Lexus RX 400h 2WD   2,200

2006 Lexus RX 400h 4WD


2007 Lexus GS 450h

Qualifying Honda  
2005 Civic Hybrid MT $1,700

2005 Civic Hybrid CVT


2006 Civic Hybrid CVT

2005 Insight CVT   1,450
2006 Insight CVT   1,450
2005 Accord Hybrid AT     650

2006 Accord Hybrid AT w/out update


2006 Accord Hybrid AT with update


*Without updated calibration

**With updated calibration  
Sources: Internal Revenue Code Section 30B and IRS Releases 2006-56, 57, 67, 86, 98, 108, and 110)

In this article, we'll explain two of the credits and show you how to combine them with another tax break for home equity loans (see the right-hand box). We also list all of the IRS-approved credit amounts to date.
Here’s what you need to know about the two credits:

1. Hybrid Vehicle Tax Credit

Qualified hybrid vehicles combine an internal combustion engine with another propulsion system that relies on an onboard rechargeable energy source like electric batteries. The credit for purchasing (not leasing) a new (not used) hybrid car or truck with a gross vehicle weight rating of 8,500 pounds or less can range between a minimum of $250 and a maximum of $3,400. Previously owned vehicles do not qualify.

To claim a credit for 2006, your new vehicle must be put to use by the end of the year. The numerous IRS-approved credit amounts announced to date are listed in the right-hand chart.

Key Point: The process of approving hybrid vehicle tax credit amounts will be ongoing as the IRS and manufacturers collaborate to determine the amounts and as new hybrid models become available. You can visit the IRS Web site at for updated information.

Potential Downside of the Hybrid Credit

Unfortunately, Congress decreed that the hybrid vehicle credit will get phased out over four calendar quarters (in other words, over 12 months) once the manufacturer has sold over 60,000 qualifying vehicles. During the 12-month phase-out period, credit amounts will first be reduced by 50 percent (for the two quarters starting with the second quarter after the 60,000 vehicle threshold is reached) and then by 75 percent (for the following two quarters). After the 12-month phase-out period is over, no further credits will be allowed for any hybrid vehicles produced by that manufacturer. (Internal Revenue Code Section 30B(f))

Warning: According to the IRS, Toyota Motor Sales USA, Inc. sold about 42,000 cars in the first quarter of 2006. (IRS Release 2006-91.) It’s likely that the 60,000 vehicle threshold was surpassed in the second quarter (probably in May). If so, the hybrid credit for Toyota and Lexus vehicles will be reduced to 50 percent of the amounts listed above for 2006 purchases that occur after 9/30/06 (in other words, purchases in the fourth quarter of this year).

Therefore, be advised that it may be necessary to buy qualifying Toyota and Lexus vehicles before October in order to collect the full credit amounts.

The second downside is that you can potentially lose out on all or part of your hybrid vehicle credit if you pay the AMT in 2006. Why? Because the credit cannot be used to reduce your federal income tax liability below your AMT liability amount reduced by certain other credits. (Internal Revenue Code Sections 30B(g)(2))

Finally, the hybrid credit will expire at the end of 2010 unless Congress takes further action.

2. IRS-Approved Alternative Fuel Vehicle Credit

The credit for hybrid cars gets the bulk of the attention but there is another new credit, for qualified alternative fuel vehicles, that also kicked off in 2006.

Eligible vehicles include cars and trucks that run solely on compressed or liquefied natural gas, liquefied petroleum gas, hydrogen, or any liquid that is at least 85 percent methanol. Reduced credits are allowed for mixed-fuel vehicles that run on a mixture of an alternative fuel and a petroleum-based fuel.

The maximum credit for garden-variety autos and light trucks is $4,000. To claim a credit in 2006, you must buy (not lease) a new (not used) vehicle, and put it to use by the end of the year. The IRS has approved credit amounts for only two cars so far. (Internal Revenue Code Section 30B(e) and IRS Release 2006-109)

Qualifying Honda Vehicles, which run on compressed natural gas:

  • 2005 Honda Civic GX – $4,000
  • 2006 Honda Civic GX – 4,000

Little-Known Negative Fact About the Alternative Fuel Credit

As is the case with the hybrid vehicle credit, you can potentially lose out on all or part of this alternative fuel vehicle credit if you are liable for the AMT in 2006. Reason: The credit cannot be used to reduce your federal income tax liability below the AMT liability amount reduced by certain other credits. (Internal Revenue Code Section IRC Sec. 30B(g)(2))

The good news: The alternative fuel credit is not subject to any phase-out rule based on sales.

Finally, as is the case with the hybrid credit, the alternative fuel credit will expire at the end of 2010 unless Congress takes further action. Ronald J. Cappuccio, J.D., LL.M.(Tax) 1800 Chapel Avenue West Suite 128 Cherry Hill, NJ 08002 Phone:(856) 665-2121      Fax: (856) 665-9005 Email:

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