Time ran out for fans of Toyota or Lexus hybrid vehicles

Sept. 30 was the last day you could get any tax credit for purchasing one of the automaker's fuel-efficient vehicles.

The Energy Policy Act of 2005, which established a new tax credit system to reward purchasers of IRS-approved hybrids, also contains a phaseout of the benefit. It kicks in after a manufacturer sells its 60,000th hybrid.

Toyota hit that sales number in June 2006, meaning that under the energy law's elaborate provisions, the tax-break rollback for eligible Toyota and its luxury-brand Lexus hybrids took effect Oct. 1, 2006. Beginning that day and running through March, the Japanese automaker's tax breaks were cut in half.

Then on April 1, 2007, the next phaseout limit kicked in, reducing the credit on Toyota and Lexus hybrids to 25 percent of the vehicle's original amount. For a Prius, the manufacturer's most popular hybrid, that means the tax savings in less than a year and a half will have gone from $3,150 to $787.50.

And this Oct. 1, all tax credits for any Toyota or Lexus hybrid disappear.

The dates and credit amounts are confusing. But if you bought one of the affected autos, you need to make note of them because they'll determine your tax break when you file your return next year.

Toyota is the first manufacturer to encounter the lower credit, and it's going to remain alone in dealing with it for a while longer. The sales-limit restriction is applied to each automaker separately, just one of several components of the new, rather convoluted, law. Below are the basics hybrid car shoppers should know.

First, there is no set tax credit amount. Precisely how much you can subtract from your final IRS bill depends on which eligible vehicle you buy. So careful car shoppers now must take into account not only miles per gallon and price, but also each auto's varying tax break.

Second, the list of IRS-certified vehicles is not fixed. As automakers produce qualified hybrids, they will be added to the roll, meaning consumers could be comparison shopping without all the possible data. Five additional Toyota/Lexus models, for example, were approved just days before that automaker's credit was reduced on Oct. 1, 2006.

Finally, the hybrid credit amount will be incrementally reduced and ultimately eliminated. That's not unusual when it comes to tax laws, but in this case the reduction schedule is particularly vexing because the law didn't set one specific date on which the credit cuts will begin. Instead, the phaseout dates will be determined on a manufacturer-by-manufacturer basis, tied to each automaker's individual hybrid sales.

That forces the car companies and their customers into a bit of a guessing game. They have to keep their eyes on sales reports and calendars, as well as on the IRS' "OK" list, to make sure they get the biggest possible tax break or don't lose the tax savings entirely.

Apply for a cheap car loan today from UK Personal Loan store

Tom Smith
3rd October 2007

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