What is an Alternative Fuel Tax Credit?

Jessica Ellis

An alternative fuel tax credit allows people to be credited part of their income tax in recompense for buying and using a vehicle powered by alternative energy. These tax credits are meant to encourage buyers to switch from fossil fuel cars to those that use renewable or sustainable forms of fuel. There are several different types of alternative fuel tax credit, depending on the type of vehicle and other factors.

A tax is sometimes applied to fuel.
A tax is sometimes applied to fuel.

As fossil fuel reserves run low and consumption continues to be astronomically high, it becomes economical for governments to encourage consumers to voluntarily stop using fossil-fuel powered vehicles. In 2005, the United States codified laws that allow tax credits for people or companies that buy alternative fuel vehicles, or AFVs, in order to promote the use of such vehicles. There are many different types of AFVs that qualify for the alternative fuel tax credit, including hybrids, biodiesel cars, ethanol or flex fuel cars, and cars that run on natural gas, methanol, or liquid petroleum gas.

It may be possible to get an alternative fuel tax credit from the IRS.
It may be possible to get an alternative fuel tax credit from the IRS.

There are several important qualifying factors that must be met in order to receive an alternative fuel tax credit. Most important, the car must be new and the buyer must be the original owner. To avoid people simply buying and reselling cars for the tax credit, the qualifying vehicle must be intended for use by the owner in order to receive the alternative fuel tax credit. Additionally, the buyer must submit the correct claim forms to the IRS and the car must be purchased after 2005. In 2010, when the credit laws were set to expire, Congress voted to extend the credits at least one more year.

It is important to note that if a consumer has bought a new AVF since 2005, he or she may still be able to claim some part of the tax credit or receive a tax deduction. Check with a tax attorney or IRS agent to discover if this option is still available. Even a small credit or deduction may be better than none at all.

Although nearly all publicly available alternative energy vehicles are eligible for some type of tax credit, not all receive the same credit amount. Hybrid vehicles, a common type of AVF, still run partially on fossil fuels. This generally means that the tax credit for a hybrid may be much lower than a vehicle that runs entirely on alternative fuels.

In addition to the federal tax credit for alternative fuel vehicles, many states and regions have additional credits and deductions available to act as incentives. The US Department of Energy website features a comprehensive list of all AVF policies per state. In most cases, these statewide incentives do not disqualify the consumer for the federal tax credit, but provide additional tax relief for statewide taxes.

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