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Credit for Hybrid Vehicles

Last night I watched the DVD version of U-571, a sea adventure in the spirit of the classic World War II films 1940’s. Most of the action took place in or around realistic models of WWI and WWII vintage submarines. Despite historical inaccuracies (for example, Americans were shown taking an Enigma encoding machine from a German submarine, when the actual feat was carried out by British sailors and officers), the film was evocative enough of the real world to stick with me after it was over. Submarines were still on my mind this morning. I wondered when they were first used. Although the idea of a submersible vessel has probably been on the wish-list of every navy of all times, the first successful delivery of a torpedo was apparently accomplished by the Confederate ship Hunley in 1864 off the coast of South Carolina.

Steam, gasoline, and diesel engines require oxygen to work. Human muscles do too, of course, but on a smaller scale. The Hunley was powered by eight men turning a crank. Submarines such as the ones portrayed in U-571 use electric engines when submerged and diesel engines when traveling on the surface. Part of what makes submarine war movies so exciting is that the people inside them are under tremendous time pressure – they can only stay underwater as long as their batteries hold out. Then they have to surface and use the diesel engines to re-charge.

In 2013 batteries are still the weakest link in any electrically powered vehicle. They don’t hold a charge very long, and it takes a relatively long time to re-charge them. Therefore, in cases where it’s possible to use internal combustion engines, such as to power cars and trucks, electric engines have not been widely used.

Modern hybrid cars overcome some of the limitations of the electrical engine by using it to assist a gasoline engine. Some hybrids are designed to minimize fuel consumption (for example, the Honda Insight); others minimize emissions (for example, the Toyota Prius).

The reason I’m writing about hybrid vehicles in a tax blog is that the Energy Policy Act of 2005 created a tax credit for purchasers of certified hybrid vehicles, and the credit has been extended through 2013. For a list of the vehicles that have been certified for the credit, and the amount of credit for each, see  the IRS guide. Edmund’s Guide to Electric and Hybrid Cars is also interesting.

Of course the tax law could never be as simple as checking a list, could it? The following limitations apply:

  1. The vehicle must be placed in service after 12/31/2005 (to “place in service” is tax jargon meaning to begin to use the vehicle);
  2. The vehicle must be used predominately within the United States;
  3. You have to be the original owner of the car – that is, it can’t be a used car or a leased car, you have to buy it new;
  4. You have to be the one who will use the care (for example, a car leasing company cannot claim the credit).

For some taxpayers, the credit is not as good as it first appears. It won’t reduce alternative minimum tax; it must be taken last after other credits such as the child care tax credit, and if your tax liability is zero by the time you get to the hybrid vehicle credit, the credit is worthless to you; and it can’t be carried over to future years.

Thinking back to that early submarine powered by eight men turning a crank – something I’d love to see would be a hybrid car incorporating pedal power. Simultaneously minimize emissions, maximize fuel efficiency, and fight obesity. Now there would be something worthy of a tax credit!