Does any one know if the Ca state offer a tax credit? I just check the IRS and they have reinstated the $2000 again this year. I bought my Prius in March 2004. Thank you for any help! 8)
First of all, there is no federal tax credit. There is an adjustment of $2000 to your taxable income on your federal return. Thus the actual federal tax savings is equal to your marginal tax rate multiplied by $2000. It is not classed as a deduction becauses you can claim it whether or not you itemize deductions. Being an adjustment, its actual value is considerably less than $2000. For example, if your marginal rate is 15%, then it is worth $300; if your marginal rate is 28% (which I believe is the current max), then your savings are $560. I don't believe the State of California adopted parallel legislation regarding hybrids, so the $2000 will need to be added back into your taxable income for state purposes. Note that this similar to what happens with IRA's. Back to the federal return, don't forget that if you itemize deductions, you can deduct the Vehicle Licence Fee portion of the car registration on your federal return. Furthermore, although this does not apply to most Californians, you can deduct the sales tax paid in 2004 instead of the income tax paid. However, you would do this only if the sales tax paid were greater, which is likely not the case if you are itemizing. This provision was added to federal law to help those in states with low or no income tax. By the way, I am not an accountant or tax attorney. I am hoping that my tax software will handle all of this smoothly.
