Unofficial Tax Guide

There are two kinds of tax deductions for automobiles available under the federal law in the US. The first is for those automobiles that qualify as clean fuel automobiles and gasoline-electric hybrids. The second is donating to charitable organizations.

Owners of clean fuel burning vehicles are entitled to a one-time tax deduction up to $2,000. Similarly owners of electric automobiles can get a one-time tax credit of $4,000. The IRS describes the clean fuel automobiles as those that are run on Natural gas, Liquefied natural gas, Liquefied petroleum gas, Hydrogen, Electricity (like hybrid vehicles) and any other fuel that is at least 85% alcohol or ether.

The tax deduction covers the cost of the vehicle’s engine, the equipment used to store and deliver the fuel and the equipment used to exhaust combusted gases. Provided the expense on this head is not more than $2,000.

This deduction applies for automobiles bought in the year 2005. Those who have purchased an automobile in 2004 or any other taxable year can still apply for this deduction. They just have to fill an amended tax 1040X Form return for that year.

Further Requisites:
• The vehicle must be new and purchased for personal usage.
• The vehicle cannot be bought for resale.
• The vehicle must be used primarily in the US.
• The vehicle’s pollution/emission capacity must meet all federal and state requirements
• The vehicle must have four or more wheels, and should be driven on road.
(Does not include automobiles operating by rail)

If any of the above requirements are altered within 3 years of purchase, the taxpayer may have to pay back some of the amount that was claimed as tax deduction.

This deduction is valid up to December 31, 2005. Automobiles bought in 2006 and later, may be entitled to a federal income tax credit. However, this is dependent on the fuel economy, fuel savings and other factors.

The second head under which tax deduction is available is vehicle donation. The rules for this are slightly more complicated. The amount of taxable deduction depends on the donor’s claimed value of the gift and how the charity uses the vehicle. Thus you might not know the amount your deduction will be when you make the donation. In addition, there is a $500 limit on the donated vehicle’s value. Beyond this the rules get even more complex. A donor can receive a fair market value deduction if the charitable organization conducts major repairs that significantly increase the value of the donated vehicle.

For the majority it is therefore better to sell the vehicle and get cash in hand than get a relatively small tax deduction. An automobile should be donated when you don’t wish to spend money on fixing it up, and, of course, if you’re in a charitable mood.