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Alternative Motor Vehicle Tax Credit Strategies and Limitations

Limitations, Recapture, and Tax Strategies

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Limitations on the Alternative Motor Vehicle Tax Credit

The alternative motor vehicle tax credit is a non-refundable tax credit. The credit will reduce your regular income tax liability, but not below zero. The credit will not reduce your alternative minimum tax, if that applies to you.

Change for 2008 only: the AMT patch provided as part of the Emergency Economic Stabilization Act allows otherwise nonrefundable personal credits to offset the AMT for 2008.

If you are eligible for multiple tax credits, there are special ordering rules for which credit to take first. The alternative motor vehicle tax credit is taken last after all the following credits take been taken into full account:

  • Child and dependent care tax credit
  • Credit for the elderly and disabled
  • Adoption tax credit
  • Child tax credit,
  • Mortgage credit,
  • Hope and Lifetime Learning tax credits,
  • Credit for retirement savings,
  • Foreign tax credit,
  • Nonconventional fuel credit, and
  • Electric vehicle credit.

So the formula for your maximum alternative motor vehicle tax credit is as follows:

Regular income tax liability
minus the total of these other tax credits
minus the tentative minimum tax calculated under the AMT rules.
For 2008, the AMT patch mentioned above allows you to use the alternative motor vehicle credit to offset any AMT liabilities. The credit would thus be limited to your regular income tax, plus the AMT, minus other tax credits.

No Carryover

Any tax liability left over by these reductions will be the maximum dollar limit of your alternative motor vehicle tax credit. If your hybrid tax credit exceeds your maximum dollar limit, the excess is not refundable, and is lost forever. The excess cannot be carried over to another year, or given away to another person.

Tax Strategies for the Limitations on the Hybrid Tax Credit

If you cannot use all your hybrid tax credit, I have some good news for you. It might be possible to have a family member purchase the car for you. The key is following the law, and making sure that the person who buys the car has enough tax liability to take full advantage of the hybrid tax credit.

The law forbids taxpayers from buying a new hybrid vehicle with the intention of reselling the car. The taxpayer must purchase the hybrid car or truck with the firm intention of using the vehicle personally. Therefore, I would caution against re-selling the car or giving the car as a gift. Here's what I suggest you do instead.

The taxpayer with the highest regular tax liability should purchase a qualifying alternative fuel car or truck. The taxpayer would be the owner of the car, would register the car in his or her own name, and would be responsible for insurance, maintenance, and other car ownership responsibilities. But the taxpayer would allow you to use the car, as needed, for free.

For example, Sarah wants to buy a new hybrid car, but she can use only $1,500 of the estimated $3,000 alternative motor vehicle tax credit. Her brother Steven has a substantial tax liability and can take advantage of the full amount of the alternative motor vehicle tax credit. Steven should purchase the hybrid car for his own personal use, but allow Sarah to borrow the car as she needs it. Under no circumstances should Steven sell or give the car to Sarah.

The tax law might allow a taxpayer to lease a qualifying vehicle. The lease would have to be for a period of time not less than the "entire economic life of the vehicle." For example, Steven (from the example above) might write up a lease contract in which he leases to Sarah the hybrid car "for the entire economic life of the vehicle." Under such a long-term lease agreement, Steven would retain full ownership of the hybrid car, and Sarah would only be leasing it. However (and this is a big however), I would caution you to wait until the IRS releases regulations to interpret this new tax law before entering into such an arrangement, just to make sure you are fully eligible to take advantage of the alternative motor vehicle tax credit. When I suggested this strategy to CCH federal tax analyst Mark Luscombe, he responded, "Maybe we will just have to wait for the [IRS] regulations to clarify this." I agree. (Note: last I checked, the IRS has not issued regulations for the alternative motor vehicle credit.)

Recapture: Penalty for Selling Your Hybrid Car Early

The new law for the alternative motor vehicle tax credit requires taxpayers to recapture their hybrid tax credit if they re-sell their hybrid car or truck. Further details will be provided by the IRS when they issue regulations to interpret and implement this new tax law. For now, I would advise against selling, leasing, or giving hybrid cars away until we find out how long you have to keep the car.

Small Businesses Can Use the Hybrid Tax Credit

The hybrid tax credit is available to both individuals and businesses, including self-employed people. Business owners are accustomed to depreciating their business assets, and sometimes taking a Section 179 deduction to expense some or all of their assets in the first year of use.

The cost basis of a hybrid car must be reduced by the allowable amount of the hybrid tax credit. After cost basis is reduced, the remaining basis can be depreciated or expensed as a Section 179 deduction.

Table of Contents
Alternative Motor Vehicle Tax Credit: Basic Info and Qualifications (page 1)
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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