Tax Breaks for Hybrid and Eco-Friendly Cars

Environmentally friendly vehicles do more than just save you money at the gas station; they can also earn you some valuable financial incentives throughout the year. Although traditional vehicles are still in the majority today, hybrids and electric cars are becoming more accessible and affordable.

The initial price tag of an eco-friendly car may come as a shock, but the long-term financial and environmental incentives are often worth the investment.

Tax Benefits

The government offers tax deductions to those who buy eco-friendly cars. The purpose of these deductions is to encourage more people to buy environmentally sustainable vehicles when in the market for a new car. For U.S. taxpayers, this often translates to lower income taxes and tax refunds.

U.S. Energy and Efficiency Laws

The U.S. Energy Policy Act of 2005 established a federal income tax credit of up to $3,400 for taxpayers who purchased new hybrid vehicles placed into service after December 31, 2005 but before December 31, 2010. These were established as dollar-for-dollar tax savings, not just deductions.

In 2007, the federal government passed the Energy Independence and Security Act, which expanded the 2005 Act to include electric vehicles and plug-in hybrids. The American Recovery and Reinvestment Act of 2009 dealt more with eco-friendly transportation infrastructure than personal tax breaks. Diesel engine, alternative fuel, and electric vehicles have all been included in this legislation. As an added incentive, some states have passed laws that allow hybrid vehicles to travel in carpool lanes without any passengers at all.

Incentives in California

The state of California has been a leader in green driving incentives in recent years. California exempts low and zero-emission vehicle drivers from the two-person minimum requirement for high occupancy vehicle (HOV) lanes. Drivers must obtain a special decal from the DMV, and then they can travel on high occupancy toll roads (HOT) for free.

Several cities, including San Jose, Hermosa Beach, and Santa Monica, offer free parking for fuel efficient vehicles. Californians who voluntarily retire high-polluting vehicles for a variety of reasons can receive $1,000 to $1,500 through a Consumer Assistance Program. Green vehicle insurance discounts of 10 percent to 30 percent are also available to California drivers. California Governor Jerry Brown recently approved legislation that includes a goal of placing at least one million zero-emission vehicles and near-zero-emission vehicles on the road in California by Jan. 1, 2023.

Incentives in Florida

The state of Florida is starting to take an active approach to rewarding eco-friendly drivers as well. Florida also offers HOV lane exemptions for low emissions vehicles that are certified by the EPA. Of course, this is more of a time-saving incentive than a money-saving one, but valuable nonetheless.

The state of Florida offers tax incentives for businesses that deal with renewal fuels and that own alternative fuel vehicles. Florida offers a Natural Gas Fuel Fleet Vehicle Rebate and a Commercial Electric Vehicle Charging Station Rebate for businesses that own alternative fuel vehicles. Although auto insurance discount rates vary by provider, eco-friendly Florida drivers may be able to obtain discounts of 10 to 30 percent as well.

Does your state offer any eco-friendly driving discounts on top of the federal financial incentives? And are these incentives enough to influence your decision to buy a hybrid or electric car?