Woo Hoo... I think?

I suppose it depends on why you're getting it and how important the tax credit is to you.

Back in '04 I expected to get an '06 (the dealer told me the waiting list was that long). When I was able to get an '05 in April I jumped at it.

If you had asked this in July, I would've urged you to get it then. Now it's so close to '06 you could probably wait. If the credit isn't as important you might be able to get a good deal because you won't be the only one willing to wait.

 

1. MSRP includes delivery, unless they've changed that.

2. If it's worth forfeiting about $2,500 ('06 break minus '05 break) to get a car two months earlier (I think you could easily get Jan. delivery somewhere not too far from you), plus another $2-2.5K difference between what a used '05 and '06 will be worth (other things being equal) later on, go for it.

 

Tax credit for '06 vs. Tax deduction for '05... depends on your situation.

The '06 tax credit is estimated at up to $3,150 for a Prius, the highest of any hybrid on the market. I believe I'm right in this: If you pay at least $3,150 in federal taxes during 2006, you will get $3,150 back from the IRS in 2007. If you pay less than $3,150 in taxes, your refund will be limited to what you actually paid to the gov't. So, if you pay $2,000 in taxes, you get back $2,000. I believe it's called a non-refundable tax credit.

The '05 tax deduction is $2,000. Deductions are different from credits. If you itemize, have many deductions, and have a moderate income, you may come out even (or better) with the deduction. If you pay alot to the gov't and/or have few deductions, you would probably do better by waiting for the tax credit.

I got my Prius just over a week ago. I could have waited, and I was willing to wait for the '06 if necessary. But I got extremely lucky... two days after I filled out the financing paperwork, my salesman called to tell me he had a pkg 6 coming in the next day that wasn't pre-sold. I took it.

Prior to going to the dealer, I went to H&R Block's website, where I ran the refund estimator. Because of my income, I wouldn't get the full tax credit. But with my other deductions (about the same each year), I estimated that my refund would be about $400 less by getting the car this year vs. waiting to get the credit and not seeing that money for another year. Considering my gas bill used to be over $300 per month, I'm going to come out about even (or better) by saving money on gas now instead of several months from now.

I'd suggest you try the refund estimator at H&R Block to see what will work better for you. Try it with your usual deductions plus the $2,000 deduction, then try it with your usual deductions and a $3,150 credit (estimate your income for '05 and '06, respectively).

Good luck. I love my new Prius, and I'm thrilled that I didn't wait!

 

First, understand that I am not a tax professional. But I have researched this on the web and talked with a tax pro about my situation. Applying what I've researched to your question, I believe you would get a $2,600 refund.

Here's a more detailed explanation of a deduction vs. a credit:

Deductions reduce your taxable income. Say you make $20,000 per year and pay taxes on that amount. Then when you file your taxes, you claim a $2,000 deduction. Now, your taxable income is reduced to $18,000. Therefore, you are only supposed to pay the gov't taxes on $18,000. You will get a small refund - the amount you paid on that other $2,000.

It's a bit more complicated than this, though. If you are single like me, you automatically get a $4,000 standard deduction, which overrides the $2,000 itemized deduction. (They are not added together.) If you claim other deductions, like charitable contributions, business use of personal property, etc, it all adds up. If your total itemized deductions (say, $6,000) are more than the standard deduction ($4,000), then you get a bigger refund by itemizing.

Credits reduce your tax liability. There are two types of credits: refundable and non-refundable. I am only going to explain the non-refundable type, because that applies here.

However, before understanding the credit, we must delve into the realm of liability. Tax liability is the amount you actually should be paying the gov't. (Realize that you don't know your tax liability until you know your taxable income.) Let's say your tax liability is $3,000. Over the course of the year, you paid $3,500 in taxes, so you over-paid and get a $500 refund. However, if over the course of the year you paid $2,500 in taxes, then you still owe $500, due by April 15.

Now back to the credit. The '06 hybrid credit is called a non-refundable tax credit, which means you only get refunded up to your tax liability. Let's suppose your tax liability is $4,000. Then you claim a $3,000 tax credit. Your tax liability is now $1,000. (If you paid $4,000 in taxes, you get a $3,000 refund. If you paid $5,000 in taxes, you get a $4,000 refund. If you paid $500 in taxes, you owe $500.)

However, let's say your tax liability is $2,000. Then you claim a $3,000 tax credit. Your refund will be $2,000 because the other $1,000 is non-refundable.

I hope this helps, and I hope I haven't mis-stated any of this. I am mostly working from my memory of conversations with a tax advisor, who is a friend of mine. I would still urge you to talk with a tax pro to make sure you get the best out of your situation.

 

Back to your original question, I don't think you're crazy but I passed on the 2005 I had ordered when it arrived in August in favor of a 2006 in January.

Because gas prices hadn't yet spiked and because I brought two other Prius buyers, I locked in a good deal under MSRP.

In the meantime, I put my old Honda Civic hatchback (beater) back into service in the interim.

No question, there may be certain advantages for you getting a 2005 now.
You make the arrangements that suit you best. B)

 

Tax incentives aside, I would not buy any car at the end of a model year at MSRP. If demand dictates that the price must be near MSRP throughout the year, I would wait for a new model year than buy at the end of a model year.

Let's say our friend Bob buys a 2005 Prius at MSRP in Dec. 2004, and our friend Jen buys a 2005 Prius at MSRP in Dec. 2005. In both cases, each paid $25000. (Actually, Jen would have paid more due to Toyota's price increase(s) during the year.) By some twist of fate, both need to sell in June 2007. The Kelley Blue Book value in both cases is $18,000 because the conditions of the cars and mileage are the same (Jen has a longer commute). Bob has owned his car for 2.5 years, whereas Jen has owned her car only 1.5 years. Both incur $7000 in depreciation. Bob's depreciation is spread over a longer time so Jen's rate of depreciation is much higher than Bob's. Poor Jen. If she had waited one month to buy a 2006 Prius, the depreciation would have been only $4000. (Note: I made up all the dollar amounts for illustration.)

The picture gets much more complex with the out-going 2005 tax deduction and the in-coming 2006 tax credit. Then it depends also on personal income levels, deductions, and Alternative Minimum Tax. AMT is snagging an increasing number of the middle class. If congress does nothing about AMT, many people who thought they would get a $3000 tax credit may get less or even nothing.

H&R Block as an interactive AMT Estimator. It's useful if you can provide amounts for 2005 income and various deductions.