Toyota Hybrids and Tax Credits – Buy Before October 1st

The federal government often tries to modify our behavior through taxes. If the government wants us to do something, it uses tax credits and deductions to make it more attractive. For example, the government promotes homeownership by giving us all the right to deduct the interest we pay on our mortgages. Thank god!

In the case of the automotive industry, the government is trying to modify our behavior when it comes to fuel consumption. One step it has taken to promote this is the creation of a tax credit for those who purchase hybrid vehicles that get excellent gas mileage. This tax credit is a powerful incentive because it is far more valuable than a tax deduction. Whereas a tax deduction is a way to reduce your gross income before figuring the tax you owe, a tax credit is applied to the actual amount of tax you owe. For example, if you owe $10,000 and can claim a tax credit of $2,000, your final tax bill is $8,000.

In the case of the hybrid market, Toyota is far and away the leader. The Toyota and Lexus brands sell huge numbers and you can claim a tax credit for differing amounts depending upon the specific model you purchase. This tax credit, however, is going to be reduced by half on October 1, 2006.

Although the government is promoting hybrids through tax credits, it is not doing so on a permanent basis. The government has qualified the tax credit by manufacturer and the number of cars sold. When a manufacturer sells 60,000 hybrid vehicles, the tax credit for each model it sells is automatically cut in half. Further reductions occur as more vehicles are sold.

As the most popular hybrid manufacturer, Toyota has crossed the 60,000 car sales threshold. On October 1, 2006, the tax credit you can claim for the purchase of any Toyota hybrid will automatically be reduced by 50 percent. If you intend to purchase one of these vehicles, now is the time! After the first, they will not be such a good deal although all other manufacturers of hybrids still qualify for the full tax credit, to wit, no other company has met the 60,000 cars sold threshold.