Automobile Tax Deduction Opportunity

By: Nicky Pilkington

Tax is one hell of a thing we allow to hate. Why does the government tax us for everything? Tax on vehicles?
Ok tax is fine, but how could I get away from it, at least partially. Let's find out...

Clean fuel vehicles and gasoline-electric hybrids are the first type of deductions allowed by the federal law. The second is for automobiles that are donated to charitable organizations.

One time tax deduction is allowed for vehicles with clean fuels and the amount is $2000 while $4000 for vehicles under electric hybrids. Vehicles running on natural gas, liquefied natural gas and other fuels where the alcohol content is at least 85% is what qualifies as a clean fuel.

$2000 includes the cost of the engine, the cost of carrying the liquid too.

Form 1040x is used in case of vehicles bought before 2004, while the above deductions are directly for vehicles bought in 2005.

Further Requisites:
• The vehicle must be new and purchased for personal usage. It 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 vehicles operating on rails)

The taxpayer has to pay some money back if any of the above rules are flouted.

This deduction is valid up till December 31, 2005. Vehicles 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 rule is slightly complicated involving the value of the vehicle and the purpose used by the organization. Thus you may not know the size of your deduction when you make the donation. In addition, there is a $500 limit on the donated vehicle's value, beyond which the rules get even more complex. A fair market value is determined during such a cause and your immediate deductions may not be known.

Of course, charity is a choice, and you shouldn't make it unless you are that philanthropic or have money at your disposal. It is better off to sell it.

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