Hybrid credit gone for Toyota, fading fast for Honda
By Kay Bell • Bankrate.com

The hybrid tax credit is entering its third year of existence. But only two manufacturers -- and their customers -- have had to pay the tax price of being too popular.

Toyota was the first to face the tax credit phaseouts, which are mandated when an automaker sells a certain number of its fuel-efficient vehicles. On Oct. 1, 2007, tax credits for all Toyota and its luxury Lexus hybrids disappeared.

Now Honda hybrids also are less tax-advantageous. The credit for that manufacturer's energy-saving autos was cut in half on Jan. 1.

The Energy Policy Act of 2005, which established a new tax credit system to reward purchasers of IRS-approved hybrids, also mandated a reduction of the tax benefit. The credit amount is cut once a carmaker sells its 60,000th hybrid.

Counterintuitive calculations
Essentially, the most popular hybrids, which usually are the most fuel-efficient, will lose their associated tax break more quickly than poorer selling makes and models. It seems counterintuitive, but Congress included the legislative limit to help out American automakers, who are substantially behind their Japanese counterparts when it comes to hybrid technology. The hope was that once the credit is gone, energy- and tax-conscious drivers would opt for other models that are less-efficient, but still afford some tax savings.

Toyota hit the 60,000 sales number in June 2006, meaning that under the energy law's elaborate provisions, the tax-break rollback for eligible hybrids from Toyota and its luxury brand Lexus took effect Oct. 1, 2006. For six months, the Japanese automaker's tax breaks were cut in half. Then they were reduced again to 25 percent of each vehicle's original amount for another six months until, on Oct. 1 2007, all tax credits for Toyota and Lexus hybrids disappeared.

Honda and its 2008 customers will now be making similar reduced-credit calculations.

The dates and credit amounts are confusing, especially since they are applied to each automaker separately. And that's just one of several components of the rather convoluted law.

But if you bought one of the autos, you need to make note of them because they determine your tax break when you file your 2007 return. Below are the basics hybrid car shoppers should know.

Tax credit for autos:

• First, there is no set tax credit amount. Precisely how much you can subtract from your final IRS bill depends on which eligible vehicle you buy. So careful car shoppers now must take into account not only miles per gallon and price, but also each auto's varying tax break. • Second, the list of IRS-certified vehicles is not fixed. As automakers produce qualified hybrids, they will be added to the roll, meaning consumers could be comparison shopping without all the possible data. Five additional Toyota/Lexus models, for example, were approved just days before that automaker's credit was reduced Oct. 1, 2006. • Finally, the hybrid credit amount will be incrementally reduced and ultimately eliminated. That's not unusual when it comes to tax laws, but in this case the reduction schedule is particularly vexing because the law didn't set one specific date on which the credit cuts will begin. Instead, the phaseout dates will be determined on a manufacturer-by-manufacturer basis, tied to each automaker's individual hybrid sales.

That forces the car companies and their customers into a bit of a guessing game. They have to keep their eyes on sales reports and calendars, as well as on the IRS's "OK" list, to make sure they get the biggest possible tax break or don't lose the tax savings entirely.

Eligible hybrid vehicles by manufacturer:
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60,000 and counting down
The credit countdown starts when a manufacturer sells 60,000 of the fuel-efficient vehicles. The tax break then is reduced over five subsequent calendar quarters after that 60,001st hybrid hits the road.

So although the credit technically is available through 2010, Toyota can no longer tout the tax benefit when marketing its vehicles. Honda dealers are now finding out just how that feels.

Meanwhile, other automakers whose hybrids aren't as hot could conceivably use the tax credit as a sales promotion all the way up to Jan. 1, 2011.

In essence, the most popular hybrid models, which also provide the most tax savings, have the shortest credit life.

Paying for popularity
The credit-cut clock started ticking in June 2006 for Toyota, the acknowledged leader, primarily due to the popularity of its Prius model.