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IRS Confirms $2,000 Hybrid Tax Deduction

November 20, 2002

Hybrid vehicles, including Honda's Insight and Civic, qualify for the federal government's $2,000 "clean burning fuel" tax deduction, the Internal Revenue Service announced recently. Federal tax law allows a deduction to be claimed for the incremental cost of motor vehicle equipment that uses a clean fuel; the electric power component of a hybrid vehicle is one example of a clean fuel. But hybrid vehicle buyers previously had difficulty determining the exact amount of the deduction because they did not know the incremental cost of a particular vehicle's clean fuel equipment. The IRS resolved this problem in May by publishing Revenue Procedure 2002-42. Revenue Procedure 2002-42 specifies a process by which manufacturers certify the incremental cost of a hybrid vehicle's electric motor and related equipment. If the IRS approves the certification, taxpayers can rely on it to claim a one-time "clean fuel property vehicle" deduction in the year the vehicle is first used. The tax deduction is taken as an adjustment to income (line 32, IRS form 1040), and taxpayers need not itemize deductions to claim it. The deduction applies for tax year 2002 and the previous two years for which hybrid vehicles were available. An amended tax return can be filed to claim the deduction for a past year. Current law phases out the clean fuel tax deduction during tax years 2004-2006. Because current hybrid vehicles are certified as being primarily gasoline powered, they are not eligible for the electric vehicle tax credit (IRS form 8834).
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