Get a $2,000 Tax Deduction for Buying a Hybrid in 2005

The Internal Revenue Service has certified certain model year 2006 Hybrid Vehicles as being eligible for the clean-burning fuel deduction. This certification means that taxpayers who purchase new hybrid vehicles during calendar year 2005 may claim a tax deduction of up to $2000 on Form 1040.

Under Working Families Relief Act of 2004 which was signed into law in October of 2004, the clean-burning fuel deduction is limited to up to $2,000 for certified vehicles first put into service in 2005 and $500 for vehicles placed in service in 2006. No deduction will be allowed after 2006.

Federal Law allows individuals to claim a deduction for the incremental cost of buying a motor vehicle that is propelled by a clean-burning fuel. By combining an electric motor with a gasoline-powered engine, these hybrid vehicles obtain greater fuel efficiency and produce fewer emissions than similar vehicles powered solely by conventional gasoline-powered engines.

This one-time deduction must be taken in the year the vehicle is originally used. The taxpayer must be the original owner. Individuals do not have to itemize deductions on their tax return to claim this deduction. This benefit can be taken as an adjustment to income on the Form 1040.

These vehicles qualify for the clean-fuel vehicle deduction:

• Lexus RX 400h — Model Year 2006
• Ford Escape Hybrid — Model Year 2005
• Toyota Prius — Model Years 2001 through 2005
• Toyota Highlander Hybrid — Model Year 2006
• Honda Insight — Model Years 2000 through 2005
• Honda Civic Hybrid — Model Years 2003 and 2005
• Honda Accord Hybrid — Model Year 2005

Individuals must use Form 1040, not one of the shorter forms, to claim this deduction. They should put "Clean-Fuel" and the deduction amount on the dotted line to the left of line 35, including this amount in that line's total adjustments to income. (They would have used line 33 on the 2003 Form 1040; line 34 on the 2002 form; line 32 the previous two years.)

Qualifying individuals who did not claim the deduction when they filed may claim it on an amended return (Form 1040X). Generally, taxpayers may amend returns up to three years from the original return's due date.

If you have any questions, please contact Feeley & Driscoll's Boston Accounting team, Email us or call 1 (888) 875-9770.

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