What IRS forms needed for the 2006 Credit

I was working on a post on exactly this topic, but I didn't get too far, but here is what I had put together so far. I would love for other to contribute to this so we could have a definitive post on this topic:

I make no claims to the accuracy of this post, this post is not tax advice, blah blah blah. I encourage revisions and corrections...this is an open source post.

This post details how to claim your tax credit for people who bought a new Prius in calendar year 2006.

1. FORMS

In order to claim the credit, you must file all of the following forms.

A. From 1040. You must use 1040 and not 1040EZ because Form 8910, Line 18 requires that you enter the credit amount on Form 1040, Line 55.

B. Form 8910, Alternative Motor Vehicle Credit. This has yet to be released for 2006, but will probably look very similar to the 2005 form.

C. Form 6251, Alternative Minimum Tax. This form must be submitted even if you are not subject to the AMT because Form 8910 requires you to enter your Tentative Minimum Tax from line 33 on Form 8910. As the instructions for 2005 Form 8910, Line 16 say, "Although you may not owe alternative minimum tax (AMT), you must still figure the tentative minimum tax (TMT) to figure your credit. Complete and attach the applicable AMT form or schedule and enter the TMT on line 16."

2. CREDIT AMOUNT

Form 8910 will tell you how much of the credit you are allowed to claim. The maximum credit that you would be allowed to claim depends on when you purchased your Prius. If you purchased your Prius and "place it into service" on or before September 30, 2006, you are eligible for the maximum credit of $3150 and would enter this amount on line 3 of Form 8910. If you purchased placed into service your Prius on or after October 1, 2006 but before January 31, 2006, you are eligible for ½ of the maximum credit.

 

4chi,

Based on the 2005 form I believe you nailed it. On www.irs.gov select "find forms and publications" in the "I need to" drop down box at the top of the right panel. Pressing "Go" takes you to the forms page. The forms are listed in numeric order. The 2006 version of form 8910 isn't posted yet.

 

ONE OTHER LITTLE DETAIL -

If your tax bill happens to be $0, You won't be able to utilize any portion of that "credit!"

Also, if you tax bill happens to be $3150, you break even!

 

There has been a lot of talk lately about the EPA revising the fuel economy estimates for the Prius. (See the Prius Hybrid News forums for more threads on that subject.)

The tax credits eligible to certain purchasers of a 2006 Prius are of course based on the EPA fuel economy estimates for 2006 models, compared to the EPA estimates for similar sized 2002 models.

The questions then are obvious:

1. IF the EPA revises the fuel economy estimates for the Prius (with reported plans to reduce the estimates by as much as 30%), will it be for current models (2007), models going forward (2008 and beyond), or will the revisions also be retroactive (affecting 2006 models, and even more remotely, 2002 models).

2. IF the revised EPA estimates are retroactive, will such revisions change the tax credit estimates?



____________________



Now, the third question is only for the eyes of speculative government conspiracy theorists. All others please ignore:

3. If both 1 and 2 are true (which would be Shucks and Awe, shucks), then is it possible that the potential loss of government tax revenue might have been a motivation for one government agency (the EPA) to make revisions in their formulations to coordinate with the newly formulated regulations of another goverment agency (the IRS) in order to stem the tide of tax credits that the energy bill inadvertantly let loose?

Now for the really hardcore:

4. If either 1 or 2 are false (which would be Awesome and Then some), then by posting the questions, did I just give the governement an idea that I'm going to regret come April?

 

I believe the tax credit is based on the hybrid technology in the vehicle, not the EPA mileage figure.

I seriously doubt the EPA is going to spend any time testing existing models. They'll have their hands full testing the newest models.

 

Interesting... When I claimed the deduction for my 2005, I didn't file any of these forms you guys refer to.
I simply added one line to my 1040 form.

I used http://www.irs.gov/newsroom/article/0,,id=107766,00.html which says:

The $2,000 deduction must be taken for the year in which the vehicle was first used and applies to tax years 2005 and earlier. This benefit is taken as an adjustment to income. You do not have to itemize deductions on your tax return to claim it, but you do have to use Form 1040. Include your deduction on the dotted line to the left of line 36 of the 2005 Form 1040, and identify it as “Clean-Fuel.â€

The procedure is much more complex (it seems) now for the 2006 credit. But in 2005, it was easy and those forms you guys refer to weren't needed. (At least that's how I read it & filed it!)

Reading this post and you guys mentioning 2005 being the same made me nervous! Thought I had done it wrong last year...

:huh:

 

<div class='quotetop'>QUOTE(fphinney @ Dec 28 2006, 12:35 AM) [snapback]367554[/snapback]</div>

It is not your tax bill, but your tax liability. You must have at least a $3150 tax liability in order to get the full credit.

 

Rick, you might search these forum archives, or, search the Energy Bill of 2005, and read pages 1391 thru 1425, or, search "Fuel Economy Credit" and "Conservation Credit", take your pick, but at the end of the day I think you will find that a substantial portion of the 2006 Alternative Motor Vehicle Credit is directly and unequivocably indexed to the Fuel Economy Ratings issued by the Environmental Protection Agency.

Hint: Read Section 1341, Subpart B of part IV of subchapter A of chapter 1 amended with Sec. 30B, under which you should refer to subparagraphs ( B )(2)(A)(i-vii), ( B )(2)( B )(i-iii), ( c )(2)(A)(i-ii), ( B )(3)(A)(i-iv)(I)... seriously. It's in there.


<div class='quotetop'>QUOTE(Rick Auricchio @ Dec 28 2006, 09:30 AM) [snapback]367685[/snapback]</div>

Good point on the retests, though.

 

Miss Taz...

What you claimed for 2005 was a tax DEDUCTION.

What we are claiming for 2006 is a tax CREDIT.

Deductions and credits are reported quite differently on IRS forms.

A deduction directly reduces taxable income.

A credit directly reduces payable tax.

Both can reduce tax liability, but depending on your tax bracket, a tax credit can reduce tax liability about 3 to 5 times more effectively when compared dollar for dollar to a tax deduction, when and where allowed.

There was no tax credit available in 2005, so you did the right thing by claiming the tax deduction, which was allowed at that time.

Tax credits are treated and reported differently than tax deductions.

If I earned $100,000., and I qualifed for a $2,000 tax deduction in 2005 for buying a 2005 Prius, that will reduce my taxable income to $98,000.

If I earned $100,000., and I qualified for a $3,150 tax credit in 2006 for buying a 2006 Prius, my taxable income will not be reduced at all, but will remain $100,000, no deduction.

However, all other things being equal, and every other exemption and deduction being ignored to simplify the scenario with respect to the Prius purchases, I will still pay less taxes for buying a Prius in 2006.

Assume my tax bracket is 28%.

In 2005, I would have normally paid the IRS $28,000 in taxes, but because I bought the 2005 Prius and got to claim the tax DEDUCTION (as you did), I only have to pay $27,440 in taxes ($98K x28%). The $2,000 tax deduction reduced my tax liability by $560.

By contrast, in 2006, I would have have normally paid the IRS $28,000 in taxes, but because I bought the 2006 Prius and got to claim the tax CREDIT of $3,150, I only have to pay $24,850. in taxes ($28K minus the credit). The $3,150 tax credit reduced my tax liability by $3,150.

In my simplified hypothetical above, the difference in reduced tax liability between the 2005 deduction, and the 2006 credit, is a net of $2,590.

As you can see, this illustration demonstrates that a tax CREDIT can be greater than 4.5 times more effective at ultimate reducing tax liability than can a tax DEDUCTION.

Unfortunately, you did not have a choice, as only a deduction was offered in the year that you placed your Prius in service.

Naturally, the foregoing is not to be construed as professional tax advice.



<div class='quotetop'>QUOTE(Miss_Taz @ Dec 28 2006, 10:52 AM) [snapback]367706[/snapback]</div>

 

<laugh>

Yes, I fully understand all the accounting and the difference between a deduction and a credit for taxes.

All I was saying was that someone had made mention of all these forms needed for filing in 2006 and made it sound like it was just like the process in 2005.

My point was that it was NOT like this in 2005. It was easy (albeit worth less!) to file for...

Thanks for the huge explanation, though. I'm sure it will help someone else anyway! :lol:

 

My apologies Miss Taz... I misinterpreted your post when you said you were "nervous: and "thought you may have done something wrong." It wasn't my intent to be pedantical, or to explain something you already understood.

I'm just very well practiced in that explanation, because I had to repeat it several times to several so called "finance managers" (glorified term for loan sharks) and car salesman back in the fall of 2005. These guys were trying to tell me that the tax advantages of purhasing a Prius would be substantially reduced because the deduction was sunsetting from $2,000 down to $500 for 2006.

Despite bringing in the text from the bill that Bush just signed to show them, they still never grasped the concept between tax credit and deduction, so I became quite honed in my presentation as I went from dealer to dealer to get on the waiting list for a 2006, even while rejecting any available 2006 stock that arrived prior to Jan 1, 2006. (I got my car Jan 2, 2006).

So, I simply launched into my tape after misinterpreting your concern. Sorry!

Anyways, now I'm wondering aloud if there is any rule made about taking the $500 deduction, as well as the $3,150 credit. That sounds a little greedy, I know, but if it is allowed under the law (I don't know if it is or isn't) that would be a new twist that I haven't heard a ruling on yet. And it would involve two types of reporting.

 

Here it is:

http://www.irs.gov/pub/irs-pdf/f8910.pdf

 

<div class='quotetop'>QUOTE(syclone @ Dec 28 2006, 04:58 PM) [snapback]367815[/snapback]</div>

Thanks for the link to the form. I don't know if this form will be accepted with a 2006 1040 tax return as it is dated 2005. It may well be that the only change to the form will be the year. This keeps the form printers in business. Look for a new version on the IRS website in February.

I'm an accountant and "The Tax Man" in the office.

 

<div class='quotetop'>QUOTE(JimN @ Dec 28 2006, 06:45 PM) [snapback]367932[/snapback]</div>

I wouldn't even try.

Cbs4, I stand corrected on the reason for the credit. But I still don't think the EPA will be changing their MPG results for existing vehicles. Certainly not by April 2007.

 

Let's see if I understand this.

If my tax liability for CY2006 is $2000 considering my income & bracket and after all deductions etc.

I now apply the $3150 credit, do I have $0 tax liability or do I receive a refund check for $1150?

 

<div class='quotetop'>QUOTE(Stepclimb @ Dec 29 2006, 05:01 PM) [snapback]368374[/snapback]</div>

Yes, your tax liability is $0.00. No, you don't get a refund. The extra credit is lost. All of the monies withheld throughout the year would be refunded.