Consumer Tax Incentives

Passenger Vehicles

What are the incentives for high-efficiency light-duty vehicles?

Tax credits are available for a variety of vehicles, primarily those using hybrid-electric drives or diesel engines. Credits are based on a complex formula determined by vehicle weight, technology, and fuel economy compared to base year models. Qualifying vehicles must also meet tailpipe emission criteria.

These credits are available for vehicles placed in service starting January 1, 2006. For hybrid and diesel vehicles made by each manufacturer, the credit will be phased out over more than a year after that manufacturer has sold 60,000 eligible vehicles. For vehicles made by manufacturers that have not reached the end of the phase-out, the credits will end for vehicles placed in service after December 31, 2010.

Read an IRS summary of the credit here.

Who is eligible for the tax credits?

Buyers and lessors of qualifying vehicles. For purchases by tax-exempt entities, however, it is the seller who is eligible for the tax credit. The benefit of the vehicle credit may be reduced or eliminated for taxpayers subject to the Alternative Minimum Tax; IRS will address this issue in future guidance.

What are the incentives and how do they work?

The mix of technologies, vehicle weight class, fuel economy, and emissions performance set forth in the legislative language creates a complex picture of which vehicles will qualify, and what the credit will be for a given vehicle. The IRS issued guidance in January 2006 setting out a process to establish the value of the credit for a given model. Manufacturers will submit to the IRS a certification that the vehicle qualifies for a credit of a certain amount. Once the IRS has acknowledged that certification, purchasers may rely upon the manufacturer's information in claiming the credit. Similarly, manufacturers will submit and IRS will acknowledge quarterly sales reports, which will determine where each manufacturer stands with respect to the phase-out period for the credits.

Currently, the IRS has acknowledged the certification of qualifying models manufactured by GMC, Chevrolet, Honda, Toyota, Lexus, Saturn, Ford and Mercury. This notice confirmed preliminary assessment of the credits by ACEEE.

What do I have to do to qualify for these incentives?

These credits are available from 2006 through 2010. Therefore, cars placed in service before January 1, 2006 will not be eligible. In addition, because of the 60,000 vehicle limit per manufacturer before the phaseout period begins, consumers who buy from companies that already sell large numbers of qualifying vehicles will experience a relatively short calendar "window of opportunity" for the credits. Consumers who buy from manufacturers that currently produce fewer qualifying vehicles will have more time to obtain the full credit.

For example, if a manufacturer sells 60,000 qualifying vehicles in the first several months of 2006, the full credits will remain available for the next calendar quarter following the quarter in which the 60,000th vehicle was sold. For the subsequent two quarters, the incentive will be 50% of the full amount. For the two quarters after that, the incentive will be 25% of the full amount. After four quarters (one year) of reduced credits, the incentives will no longer be available for vehicles sold by that manufacturer.

Click here to access IRS guidance on qualifying passenger vehicles.
Information on necessary forms is available below.

Which certified manufacturers have reached the 60,000 limit?

As of the end of May, 2006, Toyota has reached the 60,000 cap. Credits will remain in effect at the full amount through the 3rd quarter of 2006, and will decrease therafter. For more information about Toyota's phase-out, see IRS Notice 2006-78 (PDF).

Where can I learn more about qualifying vehicles and/or fuel economy?

IRS Forms

Footer Image