Claiming Tax Deduction On Your Hybrid Car

The tax deduction on hybrid cars allows owners of a hybrid car (a car that has a gasoline-powered engine and an electric motor) to receive a one-time tax relief on their federal income tax returns. This deduction is a one-time deduction, which has been granted under the Working Families Tax Relief Act of 2004.

Therefore the deduction applies to those car owners who purchased their cars in 2004 and 2005. The deduction’s limit for these two years is a very nice $2,000. Nevertheless, the law offers a reduced $500 deduction for hybrid cars which are to be purchased in 2006, and no further benefit have been planned for afterwards.

Luckily, an energy bill that was signed in August 2005 has been amended, and gives hybrid cars even more profitable impetus. The law that will come into effect from January 1, 2006 will replace the limitations of the 2004 law. As a substitute for tax deduction, the new initiative will provide for tax credits in dollars, a pleasing thought for all tax payers.

To receive these tax credits, tax payers must delay the purchase of their hybrid car to 2006. Note however, that this tax credit will only be accessible for the first 60,000 hybrids sold by the carmaker. So, if you want a car from a popular category such as Honda or Toyota, you must be careful not to wait for too long.

The law stipulates, because it is a tax deduction, that the value of the tax credit will depend on the tax range you fall into. Those who have bought hybrid vehicles in 2004 and 2005 can ask for a $2000 decrease on their 2004 or 2005 tax returns. Therefore, if you’re within the 33% tax bracket, the deduction can decrease your tax bill by $600, whilst if you are within the 15% tax bracket, you will be able to save up to $300.

You can also claim tax deduction of all hybrid vehicles that have been on road prior to 2004. For this claim to take place, the owners must adjust the tax return that was filed to ask for a reimbursement within three years of the initial return date or within two years after the tax was paid.

It is quite simple to claim your tax deduction; you don’t need to enumerate the deduction in order to claim it, but you must fill in Form 1040. Underneath the form is where your deduction should be documented, classified as ‘Clean Fuel’.


Elliott Dawson is a contributing editor at This article may be reproduced provided that its complete content, links and author byline are kept intact and unchanged. No additional links permitted. Hyperlinks and/or URLs must remain both human clickable and search engine spiderable.

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