Fuel-Efficient Vehicles Provide Big Tax Break

If you pick a fuel-efficient new car, you can benefit from a sizable tax credit that reduces your income tax dollar for dollar. This is in addition to the sales tax deduction. So for those of you who are going car shopping, read this article carefully.

Toyota & Honda No Longer Qualify – This credit is allowed for a limited number of fuel-efficient vehicles produced by each manufacturer. Toyota and Honda have already exceeded that limit, and a credit is no longer available for cars produced by those two manufacturers.

Ford on Your Mind? If you are considering a Ford or Mercury, you need to act quickly since Ford has almost reached its limit as well. The credit for the purchase of a new Ford or Mercury has already begun to phase-out, effective for purchases made after March of this year. The reduced credit percentages are:

Hybrid Credits – For other new hybrid cars, 100% of the applicable credit is allowed. The tables below (updated through April of 2009) list the qualified vehicles and the amount of credit available for each.

Lean-Burn Technology Vehicle Credit – In addition to hybrid vehicles, the government recently certified passenger cars and light trucks equipped with advanced lean-burn technology, which generally run on diesel fuel, for credit. The vehicles qualifying for this credit include the following:

• 2009 Volkswagen Jetta 2.0L TDI Sedan manual or automatic – $1,300
• 2009 Volkswagen Jetta 2.0L TDI SportWagen manual or automatic – $1,300
• Mercedes GL 320 Blue TEC – $1,800
• Mercedes R 320 Blue TEC – $1,550
• Mercedes ML 320 Blue TEC – $900

Before You Count Your Credits – Be aware, that unless you use the vehicle in business, these credits are nonrefundable personal credits that can reduce your tax to zero and any excess is lost (not refundable). For example, if you have a total regular tax liability of only $1,000 and your credit is $3,400, you will only get the benefit of $1,000 of the credit and there is no carryover to a subsequent year. For 2009, the hybrid and lean-burn technology vehicle credits are allowed to be claimed against the Alternative Minimum Tax (AMT).

On the other hand, if you use the vehicle in business, the portion of the credit attributable to the business use is a general business credit and any unused amount will carryforward to the next year. The general business credit also reduces the AMT in addition to the regular tax. For prior years, only the business portion of the credit could be used against AMT. If the vehicle is used partially for business and personal, the credit is allocated according to the use between the nonrefundable and general business credits.

It may be appropriate for you to contact this office prior to making the purchase to see how the credit will benefit your particular circumstances.

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