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As you may know, an alternative motor vehicle income tax credit is available for qualified fuel cell motor vehicles, advanced lean-burn technology motor vehicles, qualified hybrid motor vehicles and qualified alternative fuel motor vehicles purchased after 2005.
The credit amount is computed differently for each type of vehicle and may vary considerably. It may be as much as $3,400 for those who buy the most fuel-efficient hybrid vehicles. A motor vehicle need not be used in a trade or business or for the production of income in order to qualify for the credit, but it must be new.
In Fact Sheet 2007-09, dated January 11, 2007 the IRS ruled that the alternative motor vehicle credit could not be used to offset AMT (alternative minimum tax). Because the credit can only offset the excess of the regular tax liability (reduced by certain credits) over the tentative minimum tax for the tax year, even a person who is not subject to the AMT may not be able to claim the maximum allowable credit, or any credit, for the qualified vehicle that he buys.
In plain English this means that if you are subject to the Alternative Minimum Tax (AMT) then you lose the tax credit for purchasing a hybrid vehicle.
To find out if you if are subject to AMT, pull out your 2005 or 2006 form 1040. If there is a number on line 45 then you were subject to AMT in that year. Even if you were not subject to AMT in the prior year, you may be in a future year or may be close enough that you will lose a (significant) portion of the credit.
Circumstances may change from year to year so it's best to check with your tax preparer prior to purchasing a hybrid vehicle to see if you qualify for the credit.
Posted: January 2007