IRS Readies Tax Break for Hybrid Car Buyers

Original purchasers of one of the new hybrid gas-electric automobiles now entering the market will qualify for a tax break. The amount of the break is being determined now by the Internal Revenue Service under a process spelled out in recently-issued Revenue Procedure 2002-42.

One manufacturer, Toyota, claims 90% of the world market for hybrid vehicles. It says it sold 1,834 Prius models in the U.S. during April 2002. But another manufacturer, Honda, was first to market. Honda’s Insight was the first hybrid available to the car-buying public. It came on the U.S. markets in 1999. Honda also has plans to introduce a hybrid version of its Civic model, the first mainstream vehicle to be equipped with a combination gas-electric power system.

Anyone who bought a hybrid car in 2002 or 2001 is eligible for the tax-break. The maximum deduction is $2,000, and it is available in the year the vehicle is first placed in service. This deduction is an adjustment to income. So it is available, regardless of whether or not the taxpayer itemizes deductions. Because the deduction will apply to hybrid cars placed in service in prior years, some taxpayers may need to file amended returns to get their tax-breaks.

The exact amount of the credit will be calculated based on the incremental cost incurred by the manufacturer to make the vehicle capable of using a clean-burning fuel, such as the electricity in the hybrid gas-electric cars. The manufacturers of these vehicles are currently documenting their incremental costs in accordance with Revenue Procedure 2002-42. When the process is complete, hopefully in a few months, the IRS expects to announce the exact amount of the credit for each car model.

Read the IRS announcement about hybrid vehicles and Rev. Proc. 2002-42.

-Rosemary Schlank

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