Hybrid Vehicle Tax Credit

Is a hybrid car right for you?

Hybrid cars, which combine a gasoline engine with a battery-powered electric motor, are good for the earth because they suck up less gas and spit out less pollution.

But are they good for your wallet?

A hybrid, such as the Toyota Prius, Honda Insight and Honda Civic, costs anywhere from $1,500 to $4,000 more than a comparable conventional car. Despite ultra-impressive gas mileage, you'll have a tough time making up the price difference at the pump.

And that doesn't include any additional maintenance costs or the possibility that you may have trouble reselling the vehicle.

On the other hand, you do get a substantial tax break by purchasing a hybrid car.

Gas matters
Let's start by comparing the gasoline costs of driving a $20,000 Civic Hybrid with a $16,500 Civic LX. The Civic Hybrid with a manual transmission gets an impressive gas mileage of 46 miles per gallon in the city and 51 mpg on the highway. The Civic LX gets 33 mpg in the city and 39 mpg on the highway.

We'll use city mileage figures for both cars because that's the mileage estimate most drivers are likely to achieve. Let's say gas is $1.50 per gallon and you drive 15,000 miles every year.

Will you be able to rack up $3,500 in fuel cost savings with your Civic Hybrid? Not unless you plan on keeping the car forever.

Driving a Civic Hybrid, instead of a Civic LX, will trim your fuel costs by about $193 a year.

After five years, you'd save $965 at the pump. After 10 years, you'd save $1,930. After 15 years you'd save $2,895, but you'd still be more than $600 short of your $3,500 goal.

Let's take a closer look at the numbers.

To drive 15,000 miles in a year with a Civic Hybrid, you'll need to pump in about 326 gallons of gas. Pay $1.50 a gallon and your yearly fuel costs will run about $489.

To drive 15,000 miles in a year with a Civic LX, you'll need to pump in more than 454 gallons of gas. Pay $1.50 for each gallon and your yearly fuel costs will run about $682, just $193 more than the Civic Hybrid.

Of course, the more gas prices go up, the more money you'll save driving a Civic Hybrid instead of conventional Civic.

So let's say gas prices shoot up to $2 gallon. Yearly fuel expenses with a Civic LX will run about $908 compared with $652 for a Civic Hybrid. That's a savings of $256 a year. After five years of high fuel prices you'd save $1,280. But you're still a long way from recouping the extra $3,500 you paid for your environmentally friendly set of wheels. Helping the earth can be hard on your wallet.

Applying the tax breaks
A one-time federal tax deduction of $2,000 may help soften the blow. Any car shopper who purchases a new hybrid through 2004 is eligible for the full tax deduction. A smaller deduction will be available through 2006.

"It's a laudable attempt by the federal government to get you to buy a fuel-efficient vehicle," says Bob Trinz, an editor of RIA's Federal Taxes Weekly Alert.

Just how much the deduction will save you on your 2002 taxes depends on your tax bracket. A hybrid owner in the 38.6 percent tax bracket would knock $772 off their tax bill. Someone in the 35 percent tax bracket would save $700. A hybrid owner in the 27 percent tax bracket would save $540.

Fuel-efficient tax breaks
Federal tax rate	2002 tax savings for hybrid car owner
15%	$300
27%	$540
30%	$600
35%	$700
38.6%	$772

Even a hybrid owner who takes a standard deduction on their taxes will qualify for this deduction.

"You need not itemize to claim this," Trinz says. "It's commonly described as an above-the-line tax deduction."

You claim the $2,000 deduction on line 32 of tax form 1040. Be sure to write the words "clean fuel" as well.

Some states offer tax breaks to hybrid car buyers, as well. For example, in Oregon you receive a $1,500 credit when you buy any hybrid vehicle. Be sure to ask your state's tax department about hybrid cars. It could save you some serious cash on a state tax bill.

But a lot of car shoppers who would consider buying a hybrid aren't bothered by the extra costs, according to a recent survey by J.D. Power and Associates, a marketing information and research firm based in Agoura Hills, Calif.

It's the ecology, stupid
Lots of folks say they would go forward with a hybrid purchase if they could recover at the gas pump just half of the additional cost.

For example, they'd be willing to shell out $3,500 more for a Civic Hybrid as long as they could save $1,750 in gas expenses while they owned the car. A Hybrid owner who drives 15,000 miles a year could achieve that goal after five years with the help of the one-time federal tax deduction.

Why do people seem willing to take a bit a financial hit when purchasing a hybrid car?

"They want to do the right thing for the environment. They want to be seen participating in that effort," says Thad Malesh, a director of the alternative power technology practice at JD Power.

Thanks to impressive fuel efficiency and squeaky-clean emissions, hybrid cars are much kinder to the environment than traditional cars.

For example, the Toyota Prius is 90 percent cleaner than the average new 2002 model year car, according to the California Air Resources Board. This five-passenger sedan is considered a Super Ultra Low-Emission Vehicle (SULEV). And with a gas mileage of 52 mpg in the city and 45 mpg on the highway, you'll be able drive quite some time before you even have to think about refueling.

The 2003 Honda Civic Hybrid falls under the Ultra Low-Emission Vehicle (ULEV) category, which isn't too shabby either. A ULEV is about 50 percent cleaner than the average new 2001 model year car.

And while many 2004 cars fall under this category, it's tough to top Civic Hybrid's gas mileage of 46 mpg in the city and 51 mpg on the highway. A Civic Hybrid is about 30 percent more fuel efficient than a conventional, gas-powered Civic.

As for the Honda Insight, this little two-seater is the most fuel- efficient car in the country hands down. Its gas mileage is an impressive 61 mpg in the city and 68 mpg on the highway. Its automatic model, which comes with a continuously variable transmission, has been certified as a SULEV vehicle.

Can you afford a cleaner ride?
Still, as good as these cars may be for the environment, you do need to consider the long-term impact on your wallet. Here's some financial questions even the most stringent environmentalist should consider before purchasing a hybrid.

Can you and your family afford to spend an extra $1,500 to $4,000 upfront on a new car?

Hybrids by the numbers
Car	Description	Gas mileage	MSRP
Honda Insight	2-passenger hatchback	61 mpg city 68 mpg hwy	starting at $19,080
Honda Civic Hybrid	5-passenger sedan	46 mpg city 51 mpg hwy	starting at $19,550
Toyota Prius	5-passenger sedan	52 mpg city 45 mpg hwy	starting at $20,480
Source: Honda, Toyota

How long do you plan to keep the car? The resale value of a used hybrid is a big question mark. It's possible you could take another financial hit when you sell a hybrid car. If you're not prepared to keep a hybrid car for the long haul you may want to think twice about purchasing one.

Can you afford the repairs? A key concern for long-term hybrid owners is maintenance costs. If you keep a car beyond warranty, you'll be stuck with the repair bills and they could get expensive.

"At some point the batteries are going to have to be replaced and they're expensive," says Larry Webster, a technical editor at Car and Driver. "The cost could be anywhere from $1,000 to $2,000."

The hybrid parts in a Toyota Prius, including batteries, are covered by an eight-year, 100,000-mile warranty. Honda covers its hybrid systems with an eight-year, 80,000-mile warranty.

So in your ninth year as a car owner, you'll be on the hook for any hybrid repairs in addition to the car's ordinary maintenance costs.

	Copyright © 2005 Regalia & Associates	Last Modified January 1, 2005