The experts say we won’t see a return to $2.00 per gallon gas, and Congress is considering new
Federal fuel taxes. Is it time to buy a hybrid car?
The answer is yes – or maybe – or no. It all depends on a variety of factors, including your
personal situation, your driving habits, and how often you trade in your vehicles. These are all
important, since buying a hybrid does cost more than a conventional car (automakers aren’t
about to overlook an opportunity to make more money). So, how do you calculate whether buying
a hybrid makes sense for you?
First, find out the cost differential between an automaker’s conventional model versus their hybrid
model. All car makers put out the same vehicle in both forms, with the exception of the Toyota
Prius, which is only offered as a hybrid. This cost differential represents the amount you must
save in fuel costs and tax credits while you own the vehicle in order for the hybrid model to make
economic sense. For example, the Honda Civic hybrid costs around $23,500, while the similar
non-hybrid Civic EX model sells for about $20,500. The difference of $3,000 is what you must
cover while you own the vehicle in order to make the hybrid pay for itself. A good web site to find
basic pricing data is from the Kelley Blue Book at www.kbb.com.
Next, consider the Federal tax credit available for hybrid vehicle purchases. The tax credit is
available for new vehicle purchases only (you must be the first owner). Credits are set by the
government based on the relative fuel economy of the particular vehicle, and range from $450 to
$3,150. This is a tax credit that will offset your Federal income taxes dollar-for-dollar in the year
of purchase. (Note, however, that the tax credit cannot be used to offset the Alternative Minimum
Tax). The availability of the credit is based on a sliding scale that phases out completely once a
car manufacturer sells 60,000 models within a calendar year. Consult your local car dealer for the
exact credit that applies to the model you are considering. The tax credit program is set to expire
after December 31, 2010.
Next, consider your driving habits: is most of your mileage city or highway driving? This is
important, since vehicles have a wide differential in city versus highway performance. For
example, for the Honda Civic hybrid, quoted miles per gallon is 40 city and 45 highway, but for the
Civic EX it is 25 mpg city and 36 mpg highway. So, to compute the gasoline cost savings, it is
important to know which type of driving you predominantly do. Next, divide your total annual
mileage by the estimated miles per gallon for both the conventional and hybrid versions, and
multiply both results by the price of gasoline (use your best estimate of what average gas prices
will be over the period you expect to own the vehicle). Also note that some models, like the Lexus,
require premium gasoline, so factor that increased cost in if it applies to your vehicle. The
difference in gas cost savings represents the annual fuel savings of the hybrid over the
conventional model. If you want help with this calculation, there are 2 good on-line calculators at
www.fueleconomy.gov or www.hybridcars.com.
Finally, factor in your own history for owning vehicles. Are you one who trades in your car every 3
years, or do you hold onto it forever? Estimate how long you intend to hold your hybrid, then
multiply that by the annual fuel cost savings you figured above. That number, added to your
Federal tax credit, represents the estimated savings of the hybrid over the time you will own it.
Compare that to the extra you pay to buy the hybrid, and see if you make up the cost difference.
This analysis does not take into account all possible factors, such as the time value of money or
resale value differences. You may also have other, noneconomic reasons for wanting to drive a
hybrid vehicle. However, this exercise can help spell out in purely economic terms whether a
hybrid vehicle makes sense for you.
Federal fuel taxes. Is it time to buy a hybrid car?
The answer is yes – or maybe – or no. It all depends on a variety of factors, including your
personal situation, your driving habits, and how often you trade in your vehicles. These are all
important, since buying a hybrid does cost more than a conventional car (automakers aren’t
about to overlook an opportunity to make more money). So, how do you calculate whether buying
a hybrid makes sense for you?
First, find out the cost differential between an automaker’s conventional model versus their hybrid
model. All car makers put out the same vehicle in both forms, with the exception of the Toyota
Prius, which is only offered as a hybrid. This cost differential represents the amount you must
save in fuel costs and tax credits while you own the vehicle in order for the hybrid model to make
economic sense. For example, the Honda Civic hybrid costs around $23,500, while the similar
non-hybrid Civic EX model sells for about $20,500. The difference of $3,000 is what you must
cover while you own the vehicle in order to make the hybrid pay for itself. A good web site to find
basic pricing data is from the Kelley Blue Book at www.kbb.com.
Next, consider the Federal tax credit available for hybrid vehicle purchases. The tax credit is
available for new vehicle purchases only (you must be the first owner). Credits are set by the
government based on the relative fuel economy of the particular vehicle, and range from $450 to
$3,150. This is a tax credit that will offset your Federal income taxes dollar-for-dollar in the year
of purchase. (Note, however, that the tax credit cannot be used to offset the Alternative Minimum
Tax). The availability of the credit is based on a sliding scale that phases out completely once a
car manufacturer sells 60,000 models within a calendar year. Consult your local car dealer for the
exact credit that applies to the model you are considering. The tax credit program is set to expire
after December 31, 2010.
Next, consider your driving habits: is most of your mileage city or highway driving? This is
important, since vehicles have a wide differential in city versus highway performance. For
example, for the Honda Civic hybrid, quoted miles per gallon is 40 city and 45 highway, but for the
Civic EX it is 25 mpg city and 36 mpg highway. So, to compute the gasoline cost savings, it is
important to know which type of driving you predominantly do. Next, divide your total annual
mileage by the estimated miles per gallon for both the conventional and hybrid versions, and
multiply both results by the price of gasoline (use your best estimate of what average gas prices
will be over the period you expect to own the vehicle). Also note that some models, like the Lexus,
require premium gasoline, so factor that increased cost in if it applies to your vehicle. The
difference in gas cost savings represents the annual fuel savings of the hybrid over the
conventional model. If you want help with this calculation, there are 2 good on-line calculators at
www.fueleconomy.gov or www.hybridcars.com.
Finally, factor in your own history for owning vehicles. Are you one who trades in your car every 3
years, or do you hold onto it forever? Estimate how long you intend to hold your hybrid, then
multiply that by the annual fuel cost savings you figured above. That number, added to your
Federal tax credit, represents the estimated savings of the hybrid over the time you will own it.
Compare that to the extra you pay to buy the hybrid, and see if you make up the cost difference.
This analysis does not take into account all possible factors, such as the time value of money or
resale value differences. You may also have other, noneconomic reasons for wanting to drive a
hybrid vehicle. However, this exercise can help spell out in purely economic terms whether a
hybrid vehicle makes sense for you.
Disclaimer of Liability
The information in this e-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice,
accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used
as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or
taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular
situation.
The author of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a
taxing authority, nor may any user/recipient of this document use this document's written tax advice for that purpose. This document's
tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice.
Therefore, any user/recipient of this document should seek an independent tax professional's advice regarding the user/recipient's
particular circumstances.
The information is provided "as is" with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and
without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for
a particular purpose.
The information in this e-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice,
accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used
as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or
taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular
situation.
The author of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a
taxing authority, nor may any user/recipient of this document use this document's written tax advice for that purpose. This document's
tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice.
Therefore, any user/recipient of this document should seek an independent tax professional's advice regarding the user/recipient's
particular circumstances.
The information is provided "as is" with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and
without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for
a particular purpose.
| Serving the Central Pennsylvania area since 1981 |
| Robert A. Romako, CPA |
| IS A HYBRID CAR RIGHT FOR YOU? |
| Robert A. Romako, CPA Phone:717.774.3047 |
OCTOBER 2008