Almost Tax Time....Again

It depends on whether you purchase it in 2005 or 2006.
The tax deduction of $2000 is still in effect until the end of 2005.
The 2006 federal income tax credit for the Toyota Prius is generally estimated at $3150.

From the new Toyota Prius FAQ

Estimated Federal Tax Credit Incentive
The 2006 federal income tax credit for the Toyota Prius is generally estimated at $3150.
This credit is intended to offset the cost of a car being outfitted with hybrid technology.
Individuals can claim the credit for each vehicle that they purchase.
Since this is a tax credit your tax bill is reduced dollar for dollar, it will not reduce your tax bill below your alternative minimum tax.

The prior law's tax deduction of $2000 is still in effect until the end of 2005.
Under the prior law, those in the top tax bracket would realize a maximum tax savings of $700 if they purchase a hybrid vehicle before January 01, 2005.

Phase-out of the hybrid tax credit
In short, the period for the full hybrid vehicle tax credit lasts at least through the second quarter of 2006.
The date you take possession of the vehicle (not the order date) is the applicable date for purposes of the tax credit.
The 60,000 hybrid vehicle threshhold includes all models the manufacture sells after December 31, 2005.
If 60k hybrid vehicles are sold by a manufacturer sometime in the first quarter of 2006, the tax credit will follow the following schedule:
(2006Q1) - 100%
(2006Q2) - 100%
(2006Q3) - 50%
(2006Q4) - 50%
(2007Q1) - 25%
(2007Q2) - 25%
If the 60k threshold is reached in a later quarter, the 100% period will be longer for as many additional quarters as it took to meet that threshhold.
The quarters start on January 01, April 01, July 01, and October 01.
This means that the full tax credit for Toyota will be in effect at least until June 30, 2006.

Energy Policy Act of 2005
Transcribed from Energy Policy Act of 2005
“(f) Limitation on Number of New Qualified Hybrid and Advanced Lean-Burn Technology Vehicles Eligible for Credit.--
“(1) In general.—In the case of a qualified vehicle sold during the phaseout period, only the applicable percentage of the credit otherwise allowable under subsection © or (d) shall be allowed.
“(2) Phaseout period.—For purposes of this subsection, the phaseout period is the period beginning with the second calendar quarter following the calendar quarter which includes the first date on which the number of qualified vehicles manufactured by the manufacturer of the vehicle referred to in paragraph (1) sold for use in the United States after December 31, 2005, is at least 60,000.
“(3) Applicable percentage.—For purposes of paragraph (1), the applicable percentage is—
“(A) 50 percent for the first 2 calendar quarters of the phaseout period,
“(B) 25 percent for the 3d and 4th calendar quarters of the phaseout period, and
“© 0 percent for each calendar quarter thereafter.

 

H&R Block has a 2005 AMT Estimator.

If it looks like you will pay AMT for 2005 and your expected income and deductions for 2006 are similar to 2005, then it would be better to take delivery in 2005 for the deduction since you probably would get no tax benefit from the 2006 tax credit. There is a remote possibility that Congress will change this before the filing deadline in 2007, but that would be a long shot.

 

Very long indeed considering its an election year and the party in control of the government cannot afford to alienate a group of very motivated voters who have made a major purchasing decision based on a law just passed on their watch.

 

A bit of clarification: The tax credit for hybrid vehicles delivered after Jan. 1, 2006 currently cannot lower an individual's taxes below AMT. In my opinion, it is unlikely that Congress would allow this approved tax credit to lower an individual's taxes owed below AMT.

For example, suppose that a tax payer's income tax is $21,000 as calculated by the usual method before the energy tax credit and $20,000 for AMT. The 2006 tax credit for Prius is estimated at $3,150. As the tax code stands today, the tax credit cannot lower taxes below the AMT of $20,000. So $2,150 of tax credit is inapplicable, and the actual tax benefit is only $21,000 - $20,000 = $1,000.

I think it is unlikely that Congress would allow application of the full tax credit to taxes calculated by the usual method so that the taxes owed are $21,000 - $3,150 = $17,850, thereby overriding the AMT.

Here is a related excerpt from What the New Energy Bill Means for You, by Bill Bischoff, SmartMoney.com, Aug. 18, 2005:

 

Quite right.
I had missed your emphasis on AMT (although it is clearly there ).

I've been hearing rumors of repealing the hybrid tax credit in its entirety for budget cutting reasons.
I consider this unlikely for the reason I stated.
I similarly think a repeal of the AMT hybrid tax credit restriction unlikely as the governing party already has a (entirely justified) reputation for giving tax breaks to the rich and, unlike the recent temporary tax cuts, dropping the AMT restriction on the hybrid tax credit cannot be marketed as a tax cut for everybody since AMT definitively applies to wealthier taxpayers.
That'd be a tough sell in the current political climate.

 

Wealth is relative. Here in Silicon Valley, it's not unusual for a married couple to have two incomes and still be unable to afford a median price house. Their income compared to most households in the US is high, making them look wealth on paper. In reality, they feel only middle class at best.

Just for fun, I made up a hypothetical example.

$715,000: Median house price in Santa Clara County
$143,000: 20% down payment
$572,000: Mortgage

$41,160, $3,430: Annual and monthly mortgage payments for a 5/1 (30 yrs.) loan at 6%
$8,940, $745: Annual and monthly property tax
$1,500, $125: Annual and monthly homeowner's insurance

$4,300: Monthly PITI (principal, interest, tax, insurance)

$147,432: Annual income required to support this mortgage at 35% debt ratio

$9,000: Approx. California State income tax

Plugging these numbers into H&R Block's AMT Estimator, we get the following:

$13,315: Regular Fed. Income Tax
$12,852: Alternative Minimum Tax

AMT is $463 below regular tax so they pay no AMT. But wait, they bought a 2006 Prius in Jan. 2006 and thought they would get a $3,150 tax credit.

Gotcha: They only get a $463 tax benefit, far short of $3,150. They're in for a big surprise come tax season in April 2007. :blink:

BTW: This couple is in the 28% tax bracket. If they had purchased a Prius in Dec. 2005, their $2,000 tax deduction would be worth $560. They lost about $100 by waiting a month to buy their car. :huh:

The power of a little knowledge: Priceless B)

 

For ppl that bought their Prius in 05, I found a document from DOE (http://www.eere.energy.gov/cleancities/hev/pdfs/37651.pdf) describing what kind of tax deduction you are able to get (assume you don't get hit with AMT).

From that document, it's saying we get $2000 deduction from federal tax. And for state (let's take NY for example), you get a $3000 sales tax exemption and additional tax credit of $2000!

Please correct me if I am wrong.

 

Well, I see the $3k sales tax exemption for NY but not a tax "credit" of $2000.
Did you mean $2000 federal income tax deduction?

There's a link in the section on Government Incentives in the Toyota Prius FAQ which helps locate the government incentives applicable for each state. B)