Tax credits on Toyota hybrids being halved

updated 9:40 a.m. ET Sept. 21, 2006

WASHINGTON - Tax incentives for environmentally concerned drivers shopping for certain energy-efficient hybrids will soon start disappearing like autumn leaves.

The Internal Revenue Service said Wednesday its tax collectors have been told that Toyota this summer hit the legal production limit — 60,000 vehicles — that Congress imposed on vehicles eligible for a tax credit.

The announcement means that federal tax credits for Toyota and Lexus hybrid vehicles will be cut in half beginning in October, the IRS said.

The $3,150 credit for the popular Toyota Prius, the largest hybrid tax credit available, will shrink to $1,575 on Oct 1.

Credits for other hybrids manufactured by Toyota, including certain Camry, Highlander and Lexus vehicles, will shrink to between $775 to $1,300.

Under the schedule set by the hybrid tax credit law, the tax break will be cut in half again to 25 percent of its original value six months later.

Beginning April 1, 2007, the tax credit for the Prius will be $787.50, and credits for other Toyota and Lexus vehicles will range from $387.50 to $650.

No credits can be claimed for the purchase of Toyota hybrid vehicles beginning Oct. 1, 2007.

Taxpayers can still claim full tax credits for purchasing hybrids made by other manufacturers, such as Honda Motor Co., Ford Motor Co. and General Motors Corp., until those manufacturers trigger the vehicle production limits or the tax break expires in 2011.

Tax credits for other hybrids range from $250 to $2,600, depending on the vehicle.

The tax break, part of a mammoth energy plan designed to promote cleaner energy and more conservation, lets buyers claim a credit worth up to $3,400 for purchasing new hybrids.

The size of the available credit varies depending on the vehicle’s make and model. A credit reduces taxes dollar-for-dollar.

The law limited the tax credit to the first 60,000 vehicles produced by each auto manufacturer. After reaching that limit, the full credit is available only through the next quarter. The credit then shrinks to half its value for six months, and then to one-quarter for another six months, before disappearing entirely.

President Bush has asked Congress to make all hybrid vehicles sold this year eligible for the tax break, one element of a proposal to reduce oil and gas consumption. Congress has not acted on that recommendation.

IRS background on tax credits for all carmakers' hybrid models is online at  www.irs.gov/newsroom/article/0,,id=157632,00.html

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