Hybrid vehicles generate tax savings.

• Author: Moore, Philip E.

Hybrid-fuel vehicles can offer their owners significant tax savings, in addition to providing significant fuel savings and promoting environmental cleanliness. Hybrid vehicles combine an efficient and powerful gasoline-fueled internal combustion engine with a clean and quiet electric motor. Under the Energy Policy Act of 1992, owners of such clean-fuel vehicles receive a $2,000 deduction from gross income under Sec. 179A. Unfortunately, in 1992, such vehicles were neither mass-produced nor affordable. Today that situation is quite different. Hybrid vehicles (such as the Toyota Prius and the Honda Insight) exist and are quite affordable. Toyota is currently the top hybrid producer and has sold more than 10,000 vehicles since it introduced the Prius in the U.S.; Honda has sold over 5,000 of its Insight coupe. In addition, Ford, General Motors and Chrysler all plan to sell hybrid vehicles in the future, including hybrid sport utility vehicles and tracks.

To qualify for this tax benefit, the vehicle does not even have to be used in a trade or business. The deduction is available to any retail purchaser for up to $2,000 of the cost of the vehicle, for new vehicles placed in service before 2005. The deduction is not available for leased vehicles. A taxpayer does not have to itemize to claim the deduction, but he must file Form 1040.

The overall tax benefit depends on the taxpayer's situation, particularly if he uses the vehicle for business purposes and can claim additional depreciation deductions. If a taxpayer in the 10% tax bracket purchases a hybrid vehicle in 2001 not used for business, the $2,000 reduction in taxable income would be worth $200. For a taxpayer in the 39.1% bracket, it would be $782. Naturally, the tax benefit would increase if the vehicle was used for business purposes and the taxpayer could claim depreciation.

Claiming a hybrid-vehicle deduction is quite simple. If the taxpayer does not use the vehicle for business...