Don't Mess With Taxes

Toyota hybrid vehicle buyers who dally this summer are likely to miss out on the maximum Alternative Motor Vehicle Credit (discussed in this earlier post), but Ford fans still have plenty of time, and a couple more automotive choices, to get the full tax break.

The IRS says that Ford's 2007 Escape hybrids (front and four-wheel drive models) and its new Mercury Mariner four-wheel drive now qualify for the credit.

Below is the complete list, to date, of vehicles by manufacturer and the maximum available credit that purchasers can claim on their tax returns next year:

Ford/Mercury
2007 Ford Escape Front WD Hybrid -- $2,600
2007 Ford Escape 4 WD Hybrid -- $1,950
2007 Mercury Mariner 4 WD Hybrid -- $1,950
2006 Ford Escape Hybrid Front WD -- $2,600
2006 Ford Escape Hybrid 4 WD -- $1,950
2006 Mercury Mariner Hybrid 4 WD -- $1,950

Toyota/Lexus
2007 Toyota Camry Hybrid -- $2,600
2007 Lexus GS 450h -- $1,550
2006 Toyota Prius -- $3,150
2006 Toyota Highlander 4WD Hybrid -- $2,600
2006 Toyota Highlander 2WD Hybrid -- $2,600
2006 Lexus RX400h 2WD -- $2,200
2006 Lexus RX400h 4WD -- $2,200
2005 Toyota Prius -- $3,150

Honda (more Honda details in this post)
2006 Honda Insight CVT -- $1,450
2006 Honda Civic Hybrid CVT -- $2,100
2006 Honda Accord Hybrid AT with updated calibration and Navi AT with updated calibration -- $1,300 (These models without updated calibration qualify for a credit of only $650.)
2005 Honda Insight CVT -- $1,450
2005 Honda Civic Hybrid SULEV MT -- $1,700
2005 Honda Civic Hybrid SULEV CVT -- $1,700
2005 Honda Accord Hybrid AT and Navi AT -- $650

The law changing this vehicular tax break from a deduction to a tax credit is welcome, since with a credit you get to subtract the amount directly from any tax you owe. For example, if your tax bill is $2,500 and you purchased a 2006 Honda Civic Hybrid CVT, the amount you owe drops to $400 thanks to that vehicle's $2,100 credit.

60,000 countdown clock: But, and it's a big but, once a manufacturer sell 60,000 of its credit-eligible vehicles, a phase-out clock starts ticking. That means that popular hybrid models will likely be less tax beneficial.

The countdown has started on Toyota, which has been a leader in alternative-fuel vehicles. The Japanese automaker has already hit the 60,000-hybrid-sale mark, (it had sold 41,779 qualifying vehicles by early June, as noted in this earlier post).

Under the credit guidelines, anyone who buys an eligible Toyota on or after Oct. 1 will find they can only claim half the original credit amount. Toyota/Lexus hybrids purchased between April and September of 2007 will only be allowed 25 percent of the original credit.

And on or after Oct. 1, 2007, you can't get any tax credit for buying any Toyota/Lexus hybrid.

The credit will go on, however, for hybrids made by other, slower selling, automakers ... until they eventually hit the 60K mark.

Policy and politics: So what's up with brakes on the tax break? Shouldn't all energy conscious auto buyers be rewarded equally?

If the credit was only about buyers, and cutting our dependence on fossil fuel, yes. But when Congress created the credit, lawmakers also got an earful from U.S. car manufacturers.

Knowing that domestic manufacturers were behind the curve on alternative-fuel vehicles, Congress created the sales limit and phase out system. A GM lobbyist told Automotive News that the idea was to keep any one company from getting "a runaway benefit."

But it also forces -- or tries to force -- auto buyers to purchase cars that really aren't that energy efficient. Since Ford is the only U.S. manufacturer yet to be credit certified, and it's reportedly sold fewer than 20,000 of its 60,000 allotment (although this count of Ford/Mercury sales by Hybridcars.com is much, much lower), the full credit will be available longer for a domestic hybrid that gets markedly poorer mileage than its Japanese competitors.

I don't think a one-time tax break will really offset the cost of a hybrid, especially one that's not that good and will require you to keep paying each week to put gas in its tank, not to mention making monthly payments just to keep it in your garage.

READER POLL: Will the credit affect your decision to buy a hybrid? Tell us via the poll at the top of this page.

Some lawmakers, the president included, have called for expansion of the hybrid tax credit. But that looks unlikely, at least in the short term, since gas prices, although still at or near historic highs, have leveled off and the summer driving season is going to start winding down.

And, of course, Capitol Hill is going to have to actually start thinking some day about what continual and continued tax breaks are doing to the federal deficit.

Toyota, according to this post by Eric Powers over at About.com Hybrids, also is starting to look much more closely at plug-in hybrid technology, the next step in fuel-saving vehicles.

In the meantime, if you're interested in a hybrid, I'd suggest you do your auto research to find the one that best fits your driving style and budget and then head to the dealership ASAP. If you're going to get a tax break for buying, you might as well get the maximum amount.