Tax day and the hybrid tax credit

Well, tax day is here, and I got a call from a UCS member who bought a Prius in May of last year.  She was surprised when her accountant said that, despite purchasing the Prius while Toyota vehicles were still due their full tax credit, she was still only getting about 50 percent of the full $3150.  She noted that she never saw anything in the fine print from Toyota, or in the legislation itself that would explain this.

Unfortunately, her accountant was at least partly right, and the answer is not in the tax credit, but in the tax code.  Edward F. McQuarrie, a professor at Santa Clara University's Leavey School of Business, wrote an unnecessarily hyperbolic, but very informative expose in the San Francisco Chronicle that we put in our HybridNews section in January about how the little known, less understood Alternative Minimum Tax (AMT) affected people who did not even qualify to pay the AMT.

After noting that tax credits like those for hybrids were unavailable for those that had to pay the AMT, McQuarrie revealed the wrinkle in the system that hit others:

In English, you can't get the full $3,150 credit for purchasing a Toyota Prius unless your regular tax obligation exceeds your Alternative Minimum Tax (AMT) obligation by at least that amount. As a reminder, the AMT is a parallel tax system that excludes many common deductions. By law, every taxpayer must calculate both their regular tax and their AMT obligation, and pay whichever is higher…. If you manage to escape owing AMT in 2006, because your regular tax liability is, say, just $10 higher, then $10 is all the hybrid tax credit you will be able to claim So here's the key question for most hybrid car purchasers: by just how much will you escape owing AMT in 2006?

And how arcane is this little nook in the Tax Code?

Not one taxpayer in a thousand can answer this question, because if you didn't owe AMT in past years, the relevant line on your 1040 was left blank. Even if you are a Turbo Tax user, you'd have to know to open Form 6251 (automatically calculated for you by the software), and scroll down to lines 33-34. Only here would you glimpse your regular tax liability and your AMT liability side by side, allowing you to compute the gap between them, and thus the limit on your hybrid tax credit.

McQuarrie’s main point is for AMT reform, which is an issue much, much larger than the hybrid tax credit.  But for the vast majority of Prius buyers, you can take some solace in knowing you’ll likely be getting more back than you would have under the old tax deduction system (I myself got only about $700 back from Uncle Sam for my Prius in ’05).  You might also want to look at the gas prices out there to help console you as well.  All that, and you bought a car that’s better for the planet.  I can’t say it’s perfect, but at least that’s some consolation on tax day.

Posted by: ScottN