Need car-buying advice? Don't forget your accountant
Tax breaks add to the growing appeal of hybrid automobiles
When Brad White was ready to buy a new car last fall, he did all the usual things. He looked at price tags and kicked tires. He took test drives and checked under the hoods.
Then he called his accountant.
White was planning to buy a hybrid car, one powered by both electricity and gasoline. It offered him cutting-edge technology, lower fuel costs, reduced emissions -- and a sizable tax break.
''I had heard about the tax break, I just wanted to make sure I was going to get it," said White, who consulted with accountant David Alexander before shelling out about $21,000 for a 2005
Hybrid cars have been selling in the United States since 1999, but their popularity has spiked in recent years and in certain communities. In Massachusetts, it's the affluent suburbs northwest of Boston -- Lincoln, Concord, Carlisle, and Harvard -- where hybrid fever runs strongest.
According to a Boston Globe study of all registered vehicles in the state, those communities, along with Chilmark on Martha's Vineyard, have the state's highest concentrations of people who own the iconic hybrid, the Prius. The highest rate of ownership was in Harvard, where 46 of the 3,847 registered vehicles, or 1.2 percent, were Priuses. That compares to six of the 25,950 cars in Lawrence.
For accountants like Alexander, who lives in Groton and works in Harvard, the buying pattern means he needs to be familiar with the tax implications of hybrid vehicles.
And for local Toyota dealerships, business in Priuses is still booming.
At Woburn Toyota, 20 people are waiting for Priuses, said salesman Stephan Harasim. At Lexington Toyota, 70 people are on the Prius waiting list. Both dealerships say the typical Prius owner fits the area's demographics.
''These cars appeal to educated and affluent people who really care about the environment, and that's the type of people who live around here," said Lexington Toyota owner George Grey. ''A lot of [Massachusetts Institute of Technology] professors live around here, and are buying Priuses."
He added that, Prius owners pay cash for their car. And, apparently for tax reasons, most waited until this past January, when the tax advantage increased, to drive their Prius home.
''These people know exactly what they are buying," Harasim said. ''They come and say, 'I want to see the Prius,' and then they tell us things about the car that we didn't know."
Hybrid engines get significantly better gasoline mileage than conventional engines. They also produce 90 percent fewer harmful emissions than a comparable gasoline engine.
But they come at a cost, typically $3,500 to $6,000 more per car than comparable models with conventional engines. This means that the amount of money the hybrid buyer saves, or doesn't save, depends on gasoline prices. The higher gas prices go, the more quickly the hybrid owner can recoup his or her costs.
And then there's the tax break.
''People are aware of the tax credit before they call," said Alexander, a certified public accountant. ''And they want to make sure that they are getting it."
For cars purchased in 2005, the government offered a $2,000 tax deduction for hybrid owners. For people in the 25 percent tax bracket, that means a tax savings of $500. The deduction is being taken in tax returns this season.
For 2006, the federal government introduced a tax credit for owners of hybrid vehicles. The credit, which represents a one-time reduction in federal taxes, will be taken when people complete their returns next year.
The amount of the credit varies from model to model, depending on its fuel economy, weight, and tailpipe emissions. For example, the credit is $3,150 for a Prius, $2,600 for
The program runs through 2010, but it has been designed to get buyers to act fast. Congress has limited the number of cars eligible for the tax credit by manufacturer. As soon as an automaker has sold 60,000 hybrids, the tax credit begins to phase out. The Internal Revenue Service plans to keep track of the hybrid sales.
Still, these breaks pale in comparison to a former deduction that helped business owners purchase trucks, vans, and other gas-guzzling vehicles. A few years ago, a business owner who bought a vehicle that weighed more than 6,000 pounds could deduct up to $102,000 of the cost as a business expense.
But in recent years, that deduction has been modified to a more moderate annual tax deduction. And more recently, the federal government has rewritten its tax code to benefit Americans who want to use less fuel.
White, a 44-year-old executive for
''My wife and I were looking at the whole economics of it, and wanted to be sure we were right about the tax programs, too," he said. He plans to take the tax deduction in his return this year.
White travels from Leominster to Framingham to work. When he drove a Nissan, he filled up his 10-gallon tank twice a week. Now he puts 10 gallons of gasoline in his Prius every eight days.
''Instead of using 20 gallons of gas each week, I only use 10 now," he said. ''And if I use less gas and do good for the environment, that's good."
But there's more, he said.
''It's a really comfortable car," he said.
So comfortable, in fact, that he has encouraged others to buy one.
''A friend of mine ordered one after I got mine, and then once when I was in Vermont, a guy stopped me at the gas station to ask about it," said White. ''I told him he should get one."
