Hybrid Cars are More Affordable than Ever with Tax Credits and Deductions

January 5th 2006

Honda Hybrid Car

This may be the year to buy a hybrid car, truck or SUV. New tax credits have made the energy efficient cars more appealing and will help offset the cost. You may need to act quickly though because there are a limited number of credits available and for some car manufacturers the credit may last just a few months.

The credits are based on how efficient the car is compared to others in its class. For instance, if a Lexus gets 16 miles per gallon (mpg) and the Lexus hybrid in the same class only gets 18mpg, the credit would not be that much. But if you compare a Toyota Prius gas mileage to other vehicles in its class you may find the Prius beats the competition by a large margin, thus acquiring a larger tax credit.

Last year the Feds were offering a tax deduction on your 2005 taxes. Tax deductions are great but not nearly as good as a tax credit. Let’s compare a $1,000 tax credit with a $1,000 tax deduction. If you made $50,000 total income last year and paid $7,000 in taxes on that amount, a tax deduction will lower your total income by $1,000. So now your income dropped to $49,000 reducing your tax bill by a small fraction. But if you were to have gotten a tax credit of $1,000 your tax bill would have been reduced considerably. Now you would only have to pay $6,000. You really save $1,000.

There have been complaints from some consumers lately challenging the EPA mileage numbers. These tests were performed on a dynameters, not by actually driving the car. But all cars, both hybrid and non-hybrids are tested on the dynameters. Consumer Reports Magazine found that all EPA mileage numbers may vary from what you actually get, not just the numbers found on the hybrid stickers. Your regular non-hybrid gasoline cars will not give you the posted EPA numbers either.

You may be able to save money over the long haul if you make long distance commutes, especially if gas prices rise again. Also, don’t just compare the mileage, compare the tax credits also. The creidts are likely to vary from $250 to $3,400 depending on the vehicle. According to CNN each car maker is limited to just 60,000 credits and Toyota will probably sell out within a few months followed by Honda and Ford in a year or so.

If you are looking for a truck or SUV compare that vehicle to the hybrid Truck and SUV as well. These vehicles are available for 2006. Since it is a hybrid you will fill up at the gas station just like before, but the advantage being: You fill up less frequently.