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Tax Incentives for Hybrid Vehicles

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If you buy a hybrid new, you may be eligible for a one-time federal income tax deduction of up to $2,000!

Vehicles in the table to the right may be eligible for a clean fuel deduction of $2,000 for those placed in service by the end of 2005 or $500 for those put in use during 2006.

Vehicles purchased after 2006 will not be eligible for a deduction under current legislation. If you purchased the vehicle before 2005, you can claim the deduction by filing an amended tax return for the tax year in which the vehicle was purchased.
Vehicle Make & Model
Model Years
Ford Escape Hybrid
2005
Honda Accord Hybrid
2005
Honda Civic Hybrid
2003-2005
Honda Insight
2000-2005
Toyota Prius
2001-2005
* Vehicles approved by IRS as of February 10, 2005. Other hybrids may be approved at a later date.

For your vehicle to qualify, the following requirements must also be met:

  • You must purchase the vehicle new and for your own use, not for resale.
  • You must drive it mostly in the United States.
  • The vehicle must meet all federal and state emissions requirements.
  • Government agencies, tax exempt organizations, and foreign entities are not eligible.

Other requirements may also apply. If any of these conditions change within 3 years of purchase, you may have to return some of the money saved by the deduction.
How do I claim the deduction?

Whether you itemize or take the standard deduction, you can still claim the clean-fuel tax deduction. Unless the vehicle is purchased solely for business use, simply include the deduction on your 2004 1040 tax form in the "Tax, Credits, and Payments" section. Enter the amount of the deduction and the words "Clean Fuel" on the line next to line 35 and include the deduction in the total.

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If you purchased the vehicle solely for business use, just claim the deduction on the "Other expenses" line of either Schedule C or Schedule F.
What if I bought my vehicle before 2004?

If you bought your vehicle in a previous tax year, you must fill out an amended tax return Form 1040X for that year.

When does this incentive end?
The current clean-fuel vehicle tax deduction will be reduced to $500 in 2006 and will end in 2007.
Purchase Year
Maximum Deduction per Vehicle
1992-05
$2,000
2006
$500
Is this vehicle eligible for other tax incentives?
Maybe. Some state and local governments also provide incentives for alternative fuel vehicles, so you may want to check with your state or local government. The U.S. Department of Energy's Clean Cities Vehicle Buyer's Guide for Consumers may also have useful information on state/local incentives.
Are hybrids eligible for electric vehicle tax credits?
No. Some sources have stated that, because gasoline/electric hybrids use an electric motor, they are eligible for electric vehicle tax credits. According to the IRS, this is incorrect.
Where can I find additional information?
IRS Home Page

U.S. Department of Energy's Clean Cities Vehicle Buyer's Guide for Consumers

DISCLAIMER

The information on this page should not be viewed as an official or legally binding document. Other requirements or exceptions may apply. For more detailed information, please consult an IRS tax representative and/or official IRS publications.
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