How to Claim a Clean Fuel Deduction

Consumers who buy a new, qualifying hybrid vehicle are eligible for a tax credit that will directly reduce their income tax obligation and, in some cases, completely eliminate it. This credit replaces the clean fuel-burning deduction available through 2005. It offers taxpayers a dollar-for-dollar reduction in any taxes they may owe.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Tax forms
• Eligible hybrid vehicle

Claim a Clean Fuel Deduction

1. Purchase a new, clean-fuel hybrid vehicle. A qualifying vehicle must have a drive train powered by an internal combustion engine and a rechargeable battery.

2. Buy early. You can only claim the full amount of the deduction up to the end of the first calendar quarter after the quarter in which the manufacturer sells its 60,000th hybrid vehicle. The credit is reduced to 50 percent for the second and third quarters and 25 percent for the fourth and fifth quarters, after which it disappears.

3. Fill out IRS Form 8910 (Alternative Motor Vehicle Credit). Figure the business/investment portion of the clean fuel credit on line 10. Figure the personal-use part of the credit on line 18.

4. List the business/investment portion of the credit from Form 8910 on Form 3800 (General Business Credit), line 1v. Complete Form 3800 to figure your credit. List your allowable credit from line 19 on Form 1040, line 55.

5. Enter the personal use portion of the credit on Form 1040, line 55.

6. Find the allowable credit for various models of hybrid cars on the IRS website (see Resources below).

Tips & Warnings

• If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit.
• If you purchase a qualifying car in the United States but plan to operate it in a foreign country, you cannot claim a tax credit.
• Car manufacturers are required by the IRS to provide the buyer of a hybrid car eligible for the credit with a written certification specifying the dollar amount of the credit and other important information about the vehicle. Keep this statement for 4 years.
• Individual taxpayers are not allowed to carry forward any unused portion of the tax credit to a future tax year. If you can't use it, you lose it. If you purchase the hybrid through your business, however, you may carry the credit back to the prior year and then carry it forward for 20 years.
• If you are liable for Alternative Minimum Tax (AMT), the credit will not benefit you. To see if you paid AMT last year, check out line 45 of your Form 1040.

Resources

• Allowable credit for hybrid cars on the IRS website.