Can You Get a Hybrid Car Tax Deduction or Credit?

You may have heard of federal and state incentives to buy hybrid cars. But before counting on a big tax refund to offset the cost of a hybrid vehicle, you’ll need to do a little homework first. Depending on your state and what car you buy, you may get thousands in tax breaks, or you may get nothing.

In 2006, the Alternative Motor Vehicle Credit went into effect and will expire on December 31, 2010. The goal of this tax credit was to increase the production and sales of hybrid vehicles by all the major car manufacturers. This tax credit was also designed as an equal opportunity sales incentive. Buyers only get 100 percent of the tax credit if they happen to purchase one of the first 60,000 vehicles sold by that manufacturer during the time the tax credit was in effect. After a manufacturer sells 60,000 hybrid vehicles, the tax credit for that manufacturer phases out and eventually becomes zero. This means that popular hybrid cars, such as Toyota hybrids, no longer qualify for a federal tax credit. Less popular hybrid vehicles, such as the BMW Active and Cadillac Escalade, still qualify as of 2010 for the federal tax credit.

Every state has its own incentives for buying a hybrid vehicle. Some, like California offer carpool lane access to a limited number of hybrid cars. But as of 2010, California has yet to pass a tax incentive bill. Other states do offer tax incentives, each with its own set of rules to qualify. For example, Colorado hybrid buyers can receive up to a $6,000 tax credit from July 1, 2000 to January 1, 2016 if the vehicle meets certain gas mileage and emissions standards. Most states have attempted to pass bills to provide tax breaks for hybrid vehicle owners. Few of these bills have been passed.

So will you get a reduction in your taxes for buying a hybrid vehicle? The only answer to that question is--maybe. Your best chances of taking advantage of what tax breaks are available is to look for less common hybrids that still qualify for the federal tax credit. Then determine which of those may also qualify for any state tax breaks. Also, do your research the month you decide to buy the car as these incentives can change. The Union of Concerned Scientists maintains the Hybridcenter.org website where a list of federal and state tax incentives are updated regularly.