Hybrid Tax Credit: Phaseouts and Documentation to Prove the Credit Amount

Today's tax question comes from D. Loyd in Tennessee. He asks:

"I have read many articles about the Hybrid (Clean-Fuel) Tax Credit for 2006. I am an owner of a new Prius, and have not found any information about the tax credit that makes sense. I purchased the Prius in February 2006, took delivery and put it into service the same time. I realize the tax credit will phase out after 60,000 vehicles. Toyota is set to sell over that amount of hybird's and I am wondering how the phase out would work. Is the credit based on first come first serve when you fill your 2006 taxes or is it going to be based on when the vehicle was put into service. Since purchasing it in Feb. 2006 I have no doubt I am going to qualify for the credit should it be on when it was put into service, but how is the IRS going to assure this without performing an audit and requireing proof of purchase on every return that has been filed for the credit."

You should not worry about the phaseouts too much. Anyone who buys a hybrid before June 30th will qualify for the full credit amount based on the model they purchase. After June 30th, credits may or may not be limited, based on each automaker's sales data. Once an automaker sells at least 60,000 hybrid vehicles, the tax credit amount will start to gradually phase out.

Automakers are required to issue you a tax credit certification, listing a whole bunch of details, including the maximum tax credit that you are eligible for. You can see what sort of information the dealer is required to provide you with in my article on the hybrid tax credit.

Although you will not be able to predict with certainty how the phaseouts will affect you, you will be able to rely on the tax credit certification you receive from your dealer.

Throughout the tax season I will be answering one tax question per day. Do you have a question? Visit the Ask a Tax Question page. Disagree with my answers? Post your comments in the Tax Forum.