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Income Tax: From Free Golf Carts to Tax Credits for Teslas

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At the end of last year, consumers were racing to buy golf carts to get in under the wire for a fledgling income tax break that could make the purchase free by reimbursing you for buying a "low-speed neighborhood electric vehicle." Now that tax credit has morphed into a new tax break that currently covers the purchase of a $100,000 Tesla sports car.

The "new qualified plug-in electric drive motor vehicle credit" that went into effect for purchases made after Jan. 1, 2010 provides a tax credit of up to $7,500 for buying a car that's "propelled to a significant degree by an electric motor that draws electricity from a battery." That battery has to have a set capacity and meet an additional litany of qualifications that is long and complex.

As of Sunday, the IRS had certified one car that qualifies: the Tesla. It gets the maximum $7,500 credit, which provides a dollar-for-dollar reduction in the tax that you owe.

Like the credit that could make golf carts free, this credit is designed for wealthy filers. Not only are wealthy people the only ones able to buy a $100,000 car, they're the only taxpayers who pay enough income tax to take full advantage of a $7,500 credit.

The Tesla credit can reduce your tax to zero, but not below. Conveniently, it also offsets the so-called Alternative Minimum Tax. The AMT, the bane of the jet set, was designed to ensure that wealthy filers pay at least a minimum amount of income tax. Because the AMT thresholds were never adjusted for inflation, the AMT now can hit even middle-income filers, who simply have too many kids or pay too much in state income taxes. But buy a sports car that can accelerate like a rocket, and the AMT doesn't apply to you--at least not for this $7,500 give-away.

But don't be thinking that Uncle Sam is some sort of patsy. The federal government is only giving 200,000 rich people the Tesla Tax Credit. After 200,000 qualifying cars are sold, the tax credit will start to phase out and Tesla buyers will only be able to claim a $3,750 credit. Eventually the Tesla credit will be gone for good.

In theory, other cars might eventually get certified and Tesla will have to share the tax credit glory. But given the speed of the IRS certification process, it could take some time. Last year's "neighbood vehicle" credit -- that's the one that could land you a free golf cart -- passed in February. But the agency didn't start handing out certifications until late fall. That created a year-end rush to buy street-legal golf carts that some manufacturers are still trying to push through.

Here's another disturbing thing: Your accountant may tell you that the "plug-in electric drive motor vehicle credit" still applies to golf carts. I talked to three highly-qualified experts, who all maintained that Section 30D of the tax code would allow you to get this lucrative tax break for buying a street-legal golf cart. That was true if you bought in 2009, not if you're buying now. Why would accountants get this wrong?

Because the 2010 tax credit reads almost identically to the 2009 tax credit, with just a few exceptions. As a stickler for accuracy, I decided to read the whole "revenue bulletin" that describes it and discovered a provision that many tax professionals appear to have overlooked: This credit does not apply to a "low-speed vehicle within the meaning of section 571.3 of Title 49 of the Code of Federal Regulations."

The official definition: Low-speed vehicle (LSV) means a motor vehicle, (1) that is 4-wheeled, (2) whose speed attainable in 1.6 km (1 mile) is more than 32 kilometers per hour (20 miles per hour) and not more than 40 kilometers per hour (25 miles per hour) on a paved level surface, and (3) whose GVWR is less than 1,134 kilograms (2,500 pounds).
Yeah, that would be a golf cart. If your golf cart can reach highway speeds, it might eventually qualify for the 2010 credit. For now, scratch the golf cart. This credit just covers the Tesla.

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