When Bill Adams read last fall that a bigger tax break on hybrid cars would take effect on Jan. 1, he decided that buying a Toyota Prius could wait.
Adams and his wife, Anna Ciambotti, had been considering the car for its gas-sipping engine and environmental élan. The tax benefit didn’t hurt, either. People who bought cars last year with gasoline-and-electric hybrid engines can file for a $2,000 tax deduction on their 2005 federal returns. But while researching hybrids, Adams learned that for 2006, Congress had switched the deduction to a more lucrative tax credit.
He wasn’t sure how much more money he and his wife would save – the IRS hadn’t filled in all the details – but early estimates suggested that the Prius’ credit could be as high as $3,200. A tax credit is a dollar- for-dollar subtraction from the amount of tax that a person owes, while a deduction reduces only the amount of income subject to tax.
So the Youngstown, Ohio, couple postponed their purchase until Jan. 12.
The tax credit for buyers and lessees of hybrid cars is just one of several new tax breaks for consumers in the Energy Policy Act of 2005. The law, which was signed by President Bush in August and governs purchases and tax returns for 2006 and subsequent years, adds benefits for certain energy conservation measures, such as buying snugger windows and better insulation and installing solar systems for making electricity and heating water.
Neither deductions nor credits are available for 2005 federal returns for most types of household energy conservation or solar power purchases; these breaks apply only to improvements made from Jan. 1, 2006, to Dec. 31, 2007.
Tax professionals say the new credits probably will not be generous enough to induce people to buy hybrids or rooftop photovoltaic panels if they weren’t already planning to do so.
Moreover, like much of tax law, the provisions are so knotty that you may need a degree in law or accounting to untangle them.
Even the pros are still awaiting answers from the government.
Michelle D. Lamishaw, an IRS spokeswoman, could not say when the agency would provide more details but encouraged taxpayers to keep checking its website, www.irs.gov.
Heather Smith Linton, a certified public accountant in Durham, N.C., said: “You’ll have to jump through some hoops to take advantage of these things. I certainly wouldn’t call them tax simplification.”
Consider the hybrid car credit. It includes a complicated phase-out that may reduce its benefit for people who buy top- selling hybrids such as those from Toyota or Honda. The full amount of credit will be available to buyers through the quarter in which an automaker reaches 60,000 hybrids in cumulative sales. It will also be available in the following quarter, but after that it will start to decrease.
Toyota will probably reach 60,000 in the second quarter of this year, said a company spokeswoman, Nancy J. Hubbell. That means that its customers will probably begin to see the tax credit for their purchases start to decrease in the fourth quarter. If a carmaker doesn’t reach 60,000, the credit will be available to its customers through 2010.
Using formulas in the new law, the nonprofit American Council for an Energy Efficient Economy has estimated the credit amounts for several cars, including the Prius, which it said could qualify for a $3,150 break. (Estimates are online at
www.aceee.org/transportation/ hybtaxcred.htm.)
New incentives for home energy conservation and solar power are less confusing but also less generous. The law caps the credit for solar systems at 30 percent of the cost or $2,000, whichever is less. Nationwide, a typical home system costs about $25,000, said Thomas Leyden, a vice president in Law renceville, N.J., for PowerLight, a solar installer, so the $2,000 credit would apply in such a case.
Leyden said that many states also offer incentives for solar power.
The same thresholds apply to solar-powered water heaters, but the water must be for showers and sinks, not pools or hot tubs, said Bob D. Scharin, editor of Practical Tax Strategies, a journal for tax professionals. A single taxpayer can install both kinds of systems and thus receive $4,000 in credits.
Both systems must meet third-party certification requirements in the law.