No Hybrid Tax Credit

Article in San Francisco Chronicle



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URL: http://sfgate.com/cgi-bin/article.cgi?file...EDGC7N75RT1.DTL


If you are among the 150,000-plus proud purchasers of a hybrid gas-electric car during 2006, please sit down. I have bad news. Many of you will not receive the full tax credit that you expected.

To recap, in 2005, Congress passed an energy bill with numerous incentives to encourage conservation. One of these provisions provided a tax credit, beginning January 2006, for purchasers of approved hybrid gas-electric automobiles. This tax credit can be substantial -- up to $3,150 for the Toyota Prius, perhaps the best known hybrid.

Unfortunately, unless you earn more than $750,000 a year, you can't be sure you will qualify for the full published credit for your vehicle. This "gotcha" applies even if you bought the car well before October, when the tax credit for Toyota vehicles began to be reduced, per the 2005 law, because more than 60,000 Toyota hybrids had been sold.

Few Californian families with income between $150,000 and $500,000 will qualify for a penny of the credit. And under this bizarre legislation, at lower income levels, the smaller your family, the bigger the credit allowed. Likewise, single taxpayers will mostly be OK.

So this is a sorry tale of how Congress claimed credit for passing tax incentives to encourage energy conservation, while structuring the legislation in such a way as to withhold the benefit from the prosperous dual-income families who might best be able to afford the extra cost of a hybrid vehicle.

In English, you can't get the full $3,150 credit for purchasing a Toyota Prius unless your regular tax obligation exceeds your Alternative Minimum Tax (AMT) obligation by at least that amount. As a reminder, the AMT is a parallel tax system that excludes many common deductions. By law, every taxpayer must calculate both their regular tax and their AMT obligation, and pay whichever is higher.

If you paid AMT the last time you filed (as did more than 600,000 Californian taxpayers), I trust you knew up front that there would be no tax credit for your hybrid purchase -- nada, zilch. This commentary is directed at folks who have never paid AMT, but still aren't going to get the full tax credit.

If you manage to escape owing AMT in 2006, because your regular tax liability is, say, just $10 higher, then $10 is all the hybrid tax credit you will be able to claim So here's the key question for most hybrid car purchasers: by just how much will you escape owing AMT in 2006?

Not one taxpayer in a thousand can answer this question, because if you didn't owe AMT in past years, the relevant line on your 1040 was left blank. Even if you are a Turbo Tax user, you'd have to know to open Form 6251 (automatically calculated for you by the software), and scroll down to lines 33-34. Only here would you glimpse your regular tax liability and your AMT liability side by side, allowing you to compute the gap between them, and thus the limit on your hybrid tax credit.

It turns out that it is difficult for a dual-income working couple with kids to have a regular tax liability that exceeds their minimum tax liability by as much as the Prius credit of $3,150.

When there are four children (by the way, California ranks second, behind Utah, for average family size), there is a tiny income zone around $80,000 where this family would be entitled to almost the full hybrid tax credit. Otherwise, they will not be eligible for the full credit until their income passes $750,000. At the other extreme, below $60,000, their regular tax liability is zero, hence, no credit applies.

Singles do much better. They can get the full credit with income anywhere between about $25,000 and $115,000. This disparity reflects the fact that the AMT incorporates a hefty marriage penalty, and is structured to be anti-child. The larger your family, the harder it is to escape AMT; even if you do escape, the margin of escape tends to be small, which means your hybrid tax credit will be correspondingly reduced.

Single or married, it is virtually impossible for California homeowners with incomes between $200,000 and $500,000 to escape the AMT. If this is your situation, your hybrid tax credit will almost certainly be zero. In general, as income rises above $100,000, the allowable credit begins to drop rapidly, especially for larger families.

Conversely, the very best way to escape the AMT and be eligible for a full hybrid tax credit is to earn upward of a million dollars.

Childless renters in Texas will also fare relatively well; it's the combination of personal exemptions, state income tax and property tax, none of which is deductible under the AMT, that throws so many prosperous Californians into, or close to, the AMT zone.

The best way to make sense of this oddly structured tax credit is to see it as the apotheosis of Republican tax policy: that tax relief is properly reserved for those who pay the most taxes (i.e., millionaires). Families where both parents have good jobs need not apply (too many live in blue states). This assumes, of course, that Congress knew what it was doing when it drafted the hybrid tax credit. It is quite possible that when your representative voted on the 2005 energy bill, he or she didn't understand the operation of the AMT any better than you, so that the whole sorry mess is just a booboo.

Hard to say which is scarier: a Congress that trumpets its commitment to energy conservation, while cynically depriving affluent but not wealthy families of the promised tax relief -- or a Congress that doesn't understand the operation of the tax legislation it approved. Either way, billions of dollars of tax relief intended to promote environmentally conscious behavior will not be forthcoming this year.

Good for the budget deficit, I suppose.

I hope this sad tale has convinced you that no taxpayer is safe absent fundamental AMT reform. So if on April 15 you find yourself without a hybrid tax credit you had every reason to expect, don't get mad -- write your representative. Tell him or her how you intend to vote, next time, if you don't see some action on AMT reform.

In the meantime, enjoy your hybrid. Tell yourself you bought it purely on principle, without thought of monetary reward.

Edward F. McQuarrie is a professor at Santa Clara University's Leavey School of Business.

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URL: http://sfgate.com/cgi-bin/article.cgi?file...EDGC7N75RT1.DTL