Hybrid tax credit shock

Either through errors or tricky rules, not all hybrid buyers will get the tax credit they may have expected.

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By Peter Valdes-Dapena, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- If you bought a hybrid vehicle last year, and you were counting on a tax credit, you may be in for a nasty surprise.

You should already know that if you bought a Toyota or Lexus hybrid after Oct. 1, 2007, it isn't eligible for a tax credit. Toyota sold more than 60,000 hybrid vehicles in the United States that were eligible for the full credit by the summer of 2006, so the government began phasing out tax incentives for the company's hybrids beginning in the fall of that year. By the fall of 2007, the credits were gone.

And if you purchased a Honda Civic Hybrid up until the end of last year, you're still eligible for its $2,100 tax credit. If you buy a Honda hybrid this year, you may still be eligible for a tax credit, but it'll only be worth a maximum of $1,050. That same credit will be reduced again this summer, to $525.

Ford, General Motors, Nissan and Mazda, meanwhile, are not yet approaching phase-out levels for the hybrid tax credits on their vehicles.

A nasty surprise

If you bought a fully credit-eligible hybrid though, you still might still get a much smaller credit than you were expecting. Or none at all.

It has nothing to do with how many hybrid vehicles the carmaker sold. Qualifying for the credit - and how much of it you can take - depends on how close you come to having to pay the Alternative Minimum Tax.

It's a problem that could affect many hybrid car buyers who have six-figure incomes and take a lot of deductions, said Wisconsin tax preparer David Mellem.

As the name implies, the AMT sets a minimum amount of tax you must pay even if you have deductions that would seem to allow you to pay less.

The AMT disallows a lot of common deductions that are allowed under the regular code. If the AMT amount is higher, you must pay the AMT.

The rule - and the rub - when it comes to determining how much of a hybrid tax credit you get is this: it isn't allowed under the AMT.

Even if you don't have to pay the AMT, it could still take a bite out of your tax credit. If the difference between your taxes and the AMT amount happens to be less than the hybrid tax credit, you can only take part of the credit. (Otherwise, it would make your taxes less than the AMT.)

Here's how it works: Bob, Jack and Jane each purchased a Ford Escape hybrid SUV in late 2007, and each was counting on a $3,000 tax credit.

At tax time, Bob finds that his tax bill is greater under the AMT than it is under the regular code, so he must pay the AMT. Bob's Escape can't help him escape his big tax bill. He gets no hybrid tax credit.

Jack's regular taxes, on the other hand, are $3,500 more than what he would have to pay under AMT. So he doesn't have to pay AMT and he gets the full $3,000 tax credit.

Jane doesn't have to pay the AMT, either. But her taxes are just $1,200 more than she would have had to pay under AMT. So instead of the $3,000 credit she was expecting, she gets a credit of just $1,800.

Whatever your situation, make you sure you get the right paperwork from the car dealer and that you fill out the correct IRS forms. To top of page

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