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Car and Taxes

If you purchase a new hybrid gas-electric vehicle by the end of 2005, you can take a clean-fuel vehicle-tax deduction of up to $2,000

By Novella Carpenter

OK, I know you have all your W-2s by now. The chubby 1040 pamphlets are staring menacingly at you, aren't they? You're having dreams about the IRS coming to your house. What are you waiting for? I procrastinate doing taxes more than anything, too, but I've found that it's better to know the truth than to fret about the what-ifs. If you're going to owe thousands, it's better to know now and plan on how you'll pay rather than waiting until the dreaded April 15 deadline.

One of the things many people overlook with their taxes is their car-related tax deductions. My mom was thrilled when she filed her claim (she does it online, using the IRS's free version of Turbo Tax) and up popped the question: "Have you bought an Electric Car? A Hybrid?" She hadn't, but she's one of those former flower children, and she likes the idea of getting a break from the federal government for using a groovy fuel-efficient vehicle.

My accountant, the wondrous Faith Fuller, told me exactly what's going on with the hybrid deduction. If you purchase a new hybrid gas-electric vehicle by the end of 2005, you can take a clean-fuel vehicle-tax deduction of up to $2,000. This will include the Toyota Prius, the Honda Insight and the Ford Escape hybrids. In 2006, the incentive will be reduced to $500. Vehicles purchased after 2006 don't get any deduction under current rules. Great time to buy a hybrid (hint, hint). Faith said that this deduction from your adjusted gross income would save you around $500 if you are in the 25 percent tax bracket.

Other clean-fuel vehicles eligible for deductions are liquefied natural gas, liquefied petroleum gas, hydrogen, electric vehicles--and any other fuel that is at least 85 percent alcohol or ether. The electric-vehicle credit is a straight refund of up to $4,000 (the following year, it'll be $1,000). But as Faith noted, "The problem is, when I went online to find the cost of a new electric vehicle, I couldn't find one, so I can't tell you how much of a 'savings' that would be." Yes, they all seem to be at the crusher, dearie. Let's demand more EV vehicles, eh?

If you have a business, you'll need to take your tax deductions for your vehicle if you use it for business-related trips or income-producing activity. According to an article published by MSN Money, you can choose to deduct using the mileage-cost basis, where you multiply your mileage by a rate the IRS determines. This year, it's 37.5 cents per mile (for your 2005 return, it'll be 40.5 cents). Using this form, you simply take your business miles, multiply by 37.5 cents, and you've got your deduction.

Slightly more complicated is the mileage-percentage basis. Using this, you calculate what percent of the time you used your car for business and then take that percentage of all expenses incurred by having a vehicle, including maintenance, gas, oil, registration fees and depreciations. According to tax professional Fuller, "For both methods, you have to tell the IRS that you are keeping a mileage log and writing down the number of miles you drive for your business. It is easier to use the mileage rate they give you, because all you need to put on your return is the number of miles driven. With the actual cost method, you need the cost of repairs, insurance and gas as well as the miles. I've generally found that the former is easier, and it more often than not gives a higher deduction." Of course, for both of these, all parking and tolls are 100 percent deductible as business expenses.

Finally, a new chapter in the SUV-deduction front. The IRS is limiting the SUV tax deduction this year. Last year, a tax loophole allowed savvy business owners to buy SUVs and then deduct the entire cost of the SUV up front (an SUV weighing 6,000 pounds or more was considered "equipment"). Business owners got to take a full depreciation for the SUVs life at a faster rate, too. Now, according to the new rules, vehicles placed in service after Oct. 22 are limited to a deduction of $25,000 or less. Sweet tax justice.


Email me at novellacarpenter@yahoo.com.

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From the February 23-March 2, 2005 issue of Metro Santa Cruz.

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