Don't Mess With Taxes

If you want a Toyota or Lexus hybrid and a federal tax credit on your 2007 return, you've got to drive one of them off the lot by Sept. 30.

On Oct. 1, the tax breaks for the Japanese car maker's fuel-efficient vehicles vanish.

As I've recounted many, many times before, Toyota is a victim of protectionist tax writing, designed to help the domestic automakers who are well behind in this technological race.

The section of the Energy Policy Act of 2005 that created the alternative-fuel vehicle credit, mandates that once a manufacturer sells 60,000 eligible vehicles, it starts losing its tax break. Toyota hit that mark last summer; it's credit has been phasing out for the last year and will be zeroed out next month.

Honda is next. At last IRS count, it had put almost 59,000 fuel-efficient cars on U.S. roads. So Honda tax credits will start coming down in 2008.

Sales of American hybrids, however, are lagging. Ford and Mercury vehicle sales in this category amount to just more than 33,500. GM is in worse hybrid sales shape, with only 9,454 such vehicles leaving those dealerships by the end of June.

At that rate, it will be years before Ford's tax break disappears. And GM might never hit the sales cutoff/tax credit phaseout mark before the law expires at the end of 2010.

Tenuous tax lure: I don't think it will matter, though. Tax laws have been used forever, and worldwide, as underpinning for social issues (as blogged here). And while eligible taxpayers certainly welcome the breaks, tax laws don't necessarily make people do things they don't really want to do.

Sure, a brand new 2008 GM Saturn Aura will get you $1,300 off your tax bill. But if you have your heart set on a Prius or hybrid Lexus RX400h next year, you're probably going to buy one of those, even though they won't save you any tax dollars.

Why? Because Toyota has a better reputation, both in the hybrid arena and for overall dependability and service. And those are just as important as price when it come to car buying.

But if you can swing that Prius purchase in the next few weeks, you might as well get a bit of savings from Uncle Sam, too.

To find out the alternative fuel tax credit amounts to date, here's the IRS list of eligible autos. This story has that info in slide form (pretty pictures!). You also can read all the separate IRS releases on the various tax-break eligible autos.

AMT and autos: There's one other tax consideration here. If Rep. Rangel isn't able to end the alternative minimum tax any time soon (read about his efforts here), that parallel tax system could negate your hybrid credit.

The tax break for alternative fuel vehicles does not offset any AMT liability.

Fellow tax blogger William Perez at About.com: Tax Planning has the unfortunate details.

Wow! Toyota has a cool new hybrid in the works. That's it below. It's the Volta, named after the dude who invented the battery.

You can read more about it here, as well as over at Blueprint for Financial Prosperity. But really, do you need anything more than that photo?

Even without a tax break, the Volta is definitely appealing, environmentally and stylistically.

Or, as the hubby said upon seeing the snapshot, "That'll work."