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Tax Credit for Hybrid, Electric and Alternative Fuel Vehicles

Save up to $4,000 in Taxes with the Alternative Motor Vehicle Tax Credit

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Updated April 16, 2014
Individuals and businesses who buy a brand new hybrid, electric or diesel fuel vehicle can take advantage of the "Alternative Motor Vehicle Credit." This tax credit applies to new cars and trucks that are certified for the credit by the IRS.

Alternative Motor Vehicle Tax Credit

Qualifying vehicles purchased on or after January 1, 2006, will be eligible for a tax credit ranging from $400 to $4,000 based on fuel economy. The alternative motor vehicle tax credit is actually a combination of two separate tax credits. The math is complicated, and fortunately you won't have to calculate it. The car manufacturers and the IRS will certify the tax credit amount of qualifying vehicles.

Phaseout of the Alternative Motor Vehicle Tax Credit

The alternative motor vehicle tax credit may be short-lived, depending on consumer demand for the new cars powered by fuel-efficient hybrid, electric, and clean diesel motors. Most of the cars certified for the credit are hybrid cars. But the credit is also available for electric vehicles and diesel cars using advanced lean-burn technology. The dollar value of the tax credit will start to be reduced once a manufacturer sells 60,000 qualifying vehicles. The phaseout occurs at the manufacturer level. So popular brands may see their tax credits reduced sooner than less popular brands. Here are the time periods and dollar amounts for alternative motor vehicle tax credit.
"Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter." -- From the IRS

How Will You Know What the Tax Credit Amount Is?

The IRS has certified various makes and models for the hybrid credit. These certifications indicate the maximum dollar value that your tax credit will be. Your alternative motor vehicle tax credit may be reduced by various limitations.

Under guidance released by the IRS, car manufacturers can issue you a written certification specifying the dollar amount of your hybrid tax credit. The IRS mandates that the manufacturer's certification must have the following sixteen elements:

  1. Name, address, and tax identification number of the manufacturer,
  2. Make, model, model year, and other vehicle identification information,
  3. A statement that the vehicle was made by the manufacturer,
  4. The type of credit for which the vehicle qualifies,
  5. The dollar amount of the tax credit (showing all computations),
  6. The gross vehicle weight rating of the vehicle,
  7. The vehicle inertia weight class of the vehicle,
  8. The city fuel economy of the vehicle,
  9. Statement that the vehicle complies with the provisions of the Clean Air Act,
  10. Copy of the certificate that the vehicle meets emission standards under the Clean Air Act,
  11. Statement that the vehicle complies with state air quality control laws.
  12. Statement that the vehicle complies with certain motor vehicle safety provisions,
  13. Statement that the vehicle uses hybrid technology (both internal combustion and a rechargeable energy storage system),
  14. Statement that the vehicle meets or exceeds California low emissions vehicle standards,
  15. Evidence that the vehicle does not exceed maximum power standards.
  16. Perjury statement as follows: "Under penalties of perjury, I declare that I have examined this certification, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this certification are true, correct, and complete."
I suspect this will be one long tax document. You should keep this tax certification for at least four years.

How to Qualify for the Alternative Motor Vehicle Tax Credit?

There are three criteria to qualify for the hybrid tax credit:
  1. Purchase a qualifying vehicle.
  2. Purchase the vehicle new, not used.
  3. The vehicle must be used for your own personal or business use. The vehicle should not be bought with the intention of re-selling it.

Actually, there are seven criteria for being eligible for the hybrid tax credit, but these are the three criteria that you can actually control. The other criteria relate to the fuel economy and energy efficiency of the vehicle. These other criteria are reviewed by the IRS when they certify a particular vehicle for the alternative motor vehicle tax credit.

You must purchase a qualifying vehicle, and the qualifying vehicle must be "placed in service" in during the tax year for which you claim the tax credit. Placed in service means when you actually take possession of the vehicle, according to Mark Luscombe, JD, CPA and principal federal tax analyst for CCH. You must take delivery of the vehicle on or after January 1, 2006.

Table of Contents
Alternative Motor Vehicle Tax Credit: Basic Info and Qualifications (page 1)
Alternative Motor Vehicle Tax Credit: Limitations, No Carryover, Tax Strategies (page 2)
List of All Vehicles Eligible for the Alternative Motor Vehicle Tax Credit (page 3)
Phaseout Time Periods and Dollar Amounts (page 4)

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