Tax Deductions Tips
Read these 29 Tax Deductions Tips tips to make your life smarter, better, faster and wiser. Each tip is approved by our Editors and created by expert writers so great we call them Gurus. LifeTips is the place to go when you need to know about Taxes tips and hundreds of other topics.
Medical and Dental Expenses
Medical and dental expenses are considered an itemized deduction. In order to qualify for the itemized deduction, the total amount you paid for these expenses in 2006 must be more than 7.5% of your adjusted gross income. As an example, let's say your 2006 adjusted gross income was $40,000; you need to have $3,000 of qualifying medical expenses before taking any deduction.
A deductible medical expense includes payments for the diagnosis, cure, mitigation, treatment, and/or prevention of disease. The costs can affect any part or function of your body. Medical expenses also include dental expenses, supplies, equipment, and diagnostic devices needed. Medical expenses also include the travel costs to and from your doctor's office. Included in this category are also medical insurance premiums you paid, and any amount paid for qualified long term care. Some of the costs paid for long term care insurance may be deductible, also.
The IRS allows you to claim medical expenses paid for yourself, your spouse, your dependent child, and other dependent individuals (such as a handicapped relative).
Some medical expenses you may not include are any expenditures that are mainly beneficial to your general health (such as over the counter drugs – excluding insulin). You also are not allowed to deduct any cosmetic surgery that is purely cosmetic in nature (such as a hair transplant).
The IRS Publication 502 Medical and Dental Expenses contains all the information you need about this subject. Refer to it for more help regarding what is considered a medical expense and what is not. Publication 969 – Health Savings Accounts may also come in handy.
Clothing Contributions
Each year-end finds a flurry of taxpayer donations being taken to local nonprofits in order for taxpayers to claim charitable donation deductions. The IRS has certain guidelines that must be followed in order to qualify for this deduction.
In order to get the IRS deduction for donating clothing and household items, certain qualifications must be met. For clothing and household item donations made after
October 17, 2006, items valued less than $500 must be in good or better used condition in order to qualify for the deduction.
If the items are valued at over $500, the condition does not matter in order to qualify for the deduction.
In both cases, get a statement from the charitable organization stating the item's value and description of what item was donated. You do not need to file this statement with your tax return, but you need to keep it for your records. To get an idea of the fair market value of your items, check out the prices at your local thrift store. The prices found on thrift store items are equivalent to the fair market value.
Also, it is important to note that a cancelled check is sufficient evidence for donations of clothing and household items valued at less than $250.
FYI: Congress has been asked by the IRS to implement regulations denying deductions for minimal value clothing and household items. Minimal value is now considered $500 or less.
Tax Deduction Checklist
With so many items being potentially deductible on your tax return, here are some checklists for you to follow:
Miscellaneous Job Costs. These expenses are for the employed individual who has unreimbursed expenses that were incurred for the benefit of their employer. The total amount of the expenses are subject to the 2% Adjusted Gross Income floor. This floor is put in place to disallow many frivolous expenses, according to the IRS.
- Professional and association dues
- Work clothes expense (includes safety helmets, safety shoes, uniforms, etc.)
- Employment agency fees (“headhunter fees”)
- Tax preparation and advice fees
- Employee home office expenses
- Work related educational costs (including tuition)
- Tools
- Travel, entertainment, lodging, and meals on overnight trips (business related)
- Casualty losses and charitable property contribution appraisal fees
- Parking fees and tolls
- Automobile expense
- Dues and subscriptions
- Job-hunting expenses (in the same line of work only). Does not apply to first job seekers.
- Local transportation to clients (including taxi fares)
- If your employer gave you a mileage allowance during 2006 that exceeded $.445 per mile, the excess will be considered taxable income (wages) on your tax return.
- Safe-deposit box rental fee. The box must be used to hold your securities (not including tax-exempt securities). No personal effects are allowed to be stored in the safe-deposit box.
- Investment service subscriptions
- Any legal fee incurred while involving your income-producing property.
- Any salary paid for record keeping of your investment income (bookkeeper, etc.)
- Professional fees paid such as accounting
- Fees to administer or set up an IRA. These must be billed and paid separately from your regular IRA account.
- Theft or casualty loss of your income-producing property
- Fees paid for collecting dividends and interest on your income-producing property. Bank fees are included in this category. Stipulations apply.
- Any fees paid for investment management or investment planner except those involved with tax-exempt securities.
Sales & Other Tax Deductions
If you itemized your deductions on your 2006 tax return, you may deduct various tax payments you made throughout the year. Use Schedule A to report the following applicable tax payments:
- State and local personal property taxes
- State and local real property taxes
- State, local, and foreign income taxes
In order to deduct any state and local personal property taxes paid, the IRS states you can deduct state and local personal property taxes/sales taxes paid in lieu of state and local income taxes paid.
For state and local real property taxes paid, it is important to note that you must have an ownership interest in the property on which the taxes apply. Having ownership interest in the property is the only way you can legally claim the tax deduction. For instance, if your spouse has title to the property (ownership interest), and you pay the state and local real property taxes for him or her, you cannot claim the deduction if you two file separate tax returns. If, however, you file your tax return jointly, you can claim the tax payment deduction.
Arriving at the total amount of taxes you paid regarding the state, local, and foreign income taxes is more complicated than the two taxes mentioned above. Payments you need to consider when arriving at this figure include:
- Any amounts paid in 2006 when you filed your 2005 state and local tax returns
- Any estimated state and local taxes you paid in 2006
- Any amounts of state and local tax withheld from your paycheck in 2006
- Any prior year refund tax amount that was credited to your 2006 state and local tax returns.
In general, business owners will deduct any state, local, and foreign taxes paid on Schedule C. They are considered a business expense.
Mileage Expenses and Reimbursement
Allowable mileage rates for your vehicle depend upon the usage. For instance, is it for business, medical, or volunteer? Personal usage is never deductible under IRS rules.
If you use your vehicle during a volunteer service for a charitable organization, the IRS allows you to take a $.14 per mile deduction for the tax year 2006. This applies for non-Katrina related activities. For Hurricane Katrina related activities, the mileage rate deduction allowed changes to $.32 per mile. This special Katrina rate mileage rate will not apply after 2006 – for your information.
If you lease your vehicle and use it for business purposes, the IRS allows the standard mileage allowance of $.445 per mile for tax year 2006. You must use the rate for the entire lease period or not at all.
Whenever you use your vehicle for business use, you have your choice of taking either a standard mileage allowance (standard fixed rate of $.445 per mile) or the actual operating costs of your vehicle. Operating costs include mileage, gas, and repairs – among other items. NOTE: It is important to note that if you choose to use the actual method in the first year you put your car into business use, you cannot change to the standard mileage allowance rate in later years. You must choose to use the standard allowance mileage rate in the first year you put your vehicle in business use to use the method in later years.
Also, you may not claim the standard mileage allowance rate of $.445 per mile if any of the following situations are met by you:
- You have a fleet operation of vehicles whereby more than 5 vehicles are used simultaneously.
- You have used the ACRS or MACRS methods of depreciation. (The standard mileage allowance rate includes depreciation).
- You claimed first year expensing
- You use your vehicle for hire. This means you carry passengers who pay you (i.e. a taxi).
Self employed persons need to file their mileage costs (business expense) on Form C.
Tax Tip: Keep a mileage log to organize your expenses and actual mileage. Record your starting mileage, expenses incurred, and ending mileage for the entire time you use your vehicle for business purposes. If you incur mileage on one day that includes both personal and business, break it down. This mileage record log is a necessity if you choose to use the actual costs of operating your vehicle.
Home Office Tax Deduction
With more and more people setting up a home office, it is important to know what the IRS considers tax deductible. There are two tests that must be met in order to have your home office qualify for an allowable deduction. You must prove that you use your home office exclusively and regularly (on a regular basis) either as:
- Your principal place of business. This means you perform the majority of your administrative and management activities here. It also means that you have no other work place to perform the majority of these duties. Some examples of administrative and management duties include scheduling appointments, preparing presentations, record keeping, and ordering supplies.
- Your place of meeting and dealing with clients, customers, and/or patients on a regular basis. Keep a log of the clients you meet at home. Note the name, time, and purpose of your meeting in this log. Keep this log for three years after your filing date. The purpose of this log is to substantiate your home office usage in case of an IRS audit.
Use Form 8829 (Expenses for Business Use of Home) to report your home office deduction. This form will have expenses broken down into direct, indirect, and allocated.
A direct expense is 100% deductible since it is spent for just the home office. An example of a direct expense is maid service, decorating, and insuring your office equipment. Indirect expenses benefit both the entire house and your individual home office. Examples of indirect expenses include taxes, utilities, insurance, and mortgage payments are all considered valid expenses. An indirect expense needs to be deducted using a pro rata basis (described in next paragraph).
To properly report your home office expenses, you will need to know the square footage area. You will take this amount and divide by your home's total square footage to arrive at a percentage. This percentage is your applicable home office usage amount. You will use this percentage to allocate the qualifying operating expenses to your home office. All of this is explained more clearly on Form 8829.
If you use your home office for less than the full 12 months of the year, you need to prorate the usage. For instance, if you use your home office for 5 months, you will calculate your proration by 5/12 of your total office expenses.
Self-employed individuals benefit the most by the home office deduction. They regularly use their home office exclusively and regularly for administrative purposes.
Another area of concern for deducting a home office is in proving that you have a profit motive in your home office operations. You must meet the “3 of 5” test. This test shows the IRS that you have a profit motive and are not simply enjoying a hobby while claiming deductions. The 3 of 5 test states that if your business enterprise has made money for 3 out of 5 consecutive years, you have a profit motive.
Self Employed Tax Deductions
You are considered self-employed by the IRS if you: are an independent contractor, you are a sole proprietor carrying on a trade or business, or you are a member of a partnership.
Self-employed individuals are allowed a variety of tax deductions by the IRS. These expenses are known as operating costs and are a necessary part of your business enterprise. These expenses are reported on Schedule C, which is filed along with your 1040 tax return.
Operating costs you can deduct as a self-employed individual include: advertising, licenses and permits, business use of your vehicle, materials, office supplies, insurance premiums on business assets, utilities, business debt interest, equipment repairs and maintenance, travel, plus meal and entertainment expenses.
Also, you can be considered self-employed even though you have a full-time job working for someone else. Just be sure you maintain proper records proving your profit motive and valid deductions.
As a self-employed individual, the IRS states that you need to file a tax return when your gross income is at least the amount that meets the standard filing requirements. These standard filing requirements are based on your age and filing status (single, married, etc.). For instance, for the tax year 2006, a single under age 65 would have to make more than a gross income amount of $8,450. Check with your IRS tax tables for your individual figure.
Self employed individuals need to file Schedule SE (self employment tax) for any net earnings from self-employment over $600. Self-employment tax includes the payment of Medicare and social security. Instead of having your employer pay their portion of these taxes for you, as a self-employed person, you are responsible for the entire share.
For a complete list of allowable deductions for self-employed individuals, refer to IRS Publication 334 – Tax Guide for Small Business.
Tax Tip: Self employed taxpayers may deduct half of the amount they pay for self-employed tax. Use Form SE to calculate your self-employment tax.
Rental Property Tax Deduction
For those deriving expenses from rental property, there are a number of tax deductions you may claim on your tax return. All your expenses must directly apply to your rental property. In order to claim your rental property tax payment on your 2006 tax return, you must make the payment during 2006. You report the amount on Schedule E of Form 1040. Also, if you claim depreciation on your rental property, you must file Form 4562.
- Real estate taxes. If you pay any real estate taxes on your rental property, you can deduct them from your rental income.
- Tax return preparation. When you pay anyone to prepare your tax return for your rental property, you can include that expense as part of your rental expenses.
- Insurance premiums for covering your rental property against perils such as fire and property damage.
- Salaries and wages paid to any property managers, janitors, maintenance personnel, or other personnel responsible for the day-to-day operations of your rental property.
- Maintenance expenses
- Management expenses (if you don't have an on-site management office)
- Depreciation expense. For personal property found in your rental property: This includes appliances, carpeting, and furniture. All these items qualify for five-year depreciation. For your rental building: your rental property depreciation rate will vary according to whether it is nonresidential or residential status. Depreciation of both personal and real property is reported on IRS Firm 4562.
Car Donations
We have all seen the ads about donating your car to a worthwhile nonprofit agency to benefit others. The IRS has recently placed stringent substantiation and authorization requirements on this charitable donation field. Donating cars, boats, planes, and other vehicles is a complicated tax matter. We will try to make it a little easier here.
Obtain a written acknowledgement from the charity in order to substantiate the deduction of your vehicle for a claimed value of over $500. This acknowledgement must be either on IRS Form 1098-C or another equivalent statement from the charity. Also, you must receive Form 1098-C 30 days after the charity sold your vehicle – if it was sold to a needy person.
When filing your 2006 tax return, you must attach IRS Form 1098-C or the equivalent statement to it. If you do not, the IRS will not allow your deduction. Also know that cancelled checks will not be considered sufficient proof of payment.
Form 8283 must also be attached if your donated vehicle is more than $500.
If your donated vehicle is valued at less than $250, you will not need a Form 1098-C. You will only need a written acknowledgement meeting the IRS guidelines. tax tips.
Tax Tip: Your donated vehicle must be in good working order to qualify for the tax deduction.
List of Deductible Items
It is in your best interest to itemize your federal tax deductions and state tax deductions (if any) to net the largest tax cut you can. The IRS has a handful of publications that identify deductible items, including among others Publication 529, Miscellaneous Deductions; Publication 936, Home Mortgage Interest Deductions; Publication 502, Medical and Dental Expenses; and Publication 503, Child and Dependent Care Expenses. There are also publications devoted specifically to business tax deductions, including Publication 535, Business Expenses. For a complete list of forms and publications that address these and other topics regarding deductible items, visit the Topical Index to IRS Forms and Publications on the IRS' Web site.
Taxes and Fees That Are Not Deductible
If you're looking for more ways to yield a larger tax cut, chances are you're scouring all your expenses. While many taxes and fees are allowable as federal tax deductions, many others are not. Examples of taxes and fees that are not allowed as personal tax deductions on Schedule A are federal income taxes, social security taxes, estate and inheritance taxes, and homeowner association fees. Examples of disallowed local and state tax deductions include stamp taxes, transfer taxes on the sale of property, and charges for water, sewer, or trash collection. Also, state sales taxes are not deductible unless you deduct them instead of deducting your state and local income taxes.
Moving Expense Deductibles
Did you recently move because of a new job? Generally speaking, (1) if you move within a year of starting a new job, (2) if your new home is closer to your new place of employment than your old home, and (3) if your new home is at least 50 miles away from your old home you can claim some or all of your moving expenses among your personal tax deductions. Allowable expenses include those to move and store for up 30 days the contents of your home, as well as the costs of traveling to your new home, including lodging—but not including meals. So pack a cooler! There are other obscure criteria that you need to meet in order to claim moving expenses among your federal tax deductions. To make sure your expenses qualify, use the IRS interactive tool called Tax Trails - Are you Eligible to Deduct Moving Expenses. The interactive guide will prompt you to answer simple questions that the program then uses to advise you on whether or not you can deduct the expenses.
Health Savings Account Contributions Deductibles
Contributions to a health savings account (HSA) are deductible when made on an after-tax basis. For example, an employee who participates in an employer-sponsored HSA would not qualify for a deduction if the employer makes contributions on a pre-tax basis—i.e., the employer does not take any taxes out of the money being used to make the contribution. Pre-tax contributions already result in a tax cut by lowering your taxable income. Deducting the contributions would be, in the eyes of the IRS, like having your cake and eating it too. On the other hand, if you are self-employed and make contributions to an HSA, those contributions would be among the allowable federal tax deductions. For more information on HSAs, read IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
2005 Standard Deductions for Individuals
There are two main variations on the filing status for individuals. You can file single filing status or head of household. To file under head of household status, you have to be unmarried and have paid more than half of the cost to maintain a home for yourself and your claimed dependents or another qualifying person. The 2005 standard deduction for the head of household filing status is $7,300. To file single, you must be unmarried, divorced, or legally separated. The 2005 standard deduction for single filers is $5,000. Before you decide to claim the standard deduction, however, you should familiarize yourself with items you may claim as personal tax deductions to see if you could get a tax cut by itemizing. Generally speaking, if your itemized federal tax deductions exceed the standard deduction, your taxes will be lower—and that's like money in your pocket.
Student Loan Interest Deductibility
Student loan interest is one of several personal tax deductions that can be claimed on Schedule A if you itemize your federal tax deductions. If you are married filing jointly and your modified adjusted gross income is $100,000 or lower you get to claim the entire $2,500 deduction. If your income is between more than $100,000, the deduction gradually phases out up to modified adjusted gross income of $130,000 at which point the deduction is disallowed. If you are filing single or head of household status and your modified adjusted gross income is less than or equal to $50,000, you can claim the entire $2,500. As with married couples filing jointly, the deduction phases out for singles and heads of household whose modified adjusted gross income is between $50,000 and $65,000.
Deadline for Deductible IRA Contributions
Another great vehicle for lowering your 2005 income tax bill—to say nothing of planning for the future—is contributing to a deductible individual retirement account (IRA). Unlike most other personal tax deductions, the contribution does not have to be made by December 31 of the tax year. The deadline to open and fund a qualified IRA or make an additional contribution to an existing IRA that can be claimed among your federal tax deductions is the due date of your return, not including any extensions. For 2005, that means April 17 (except in certain Northeast states that have until April 18 to file). Not all IRAs are deductible, so seek tax planning advice or read IRS Publication
Home Expense Deductibles
If you own a home, you will almost certainly be able to book a substantial tax cut by itemizing home-related personal tax deductions over opting to claim the standard federal tax deduction regardless of your filing status. Two of the primary tax advantages of home ownership are the mortgage interest deduction and the property tax deduction. You may also be able to claim additional federal tax deductions if you use part of your home for a business home office or to operate a home-based business. For more on business use of your home and related deductions, read IRS Publication 587, Business Use of Your Home.
Medical Expenses Deductibles
Medical expenses are subject to the 7.5% rule. That means you will receive a tax cut only for those expenses that exceed 7.5% of your adjusted gross income. That said, while not everything medical is considered deductible, more things are allowed as medical federal tax deductions than you might think. For starters, medical expenses can be for you, your spouse, or any of your claimed dependents. Yes, there's all the standard stuff, such as payments for prescriptions, medical services, and other expenses directly attributable to diagnosis or treatment of a medical condition. But did you know that transportation costs such as train, cab, or bus fare to travel to or from a medical appointment are allowable personal tax deductions? And if you use your own car, you can claim a mileage deduction for travel to and from medical appointments. You can also claim incidental expenses related to medical appointments, such as meals and lodging as long as the sole reason you incurred the expenses were related to diagnosis and/or treatment of a medical condition. For more information on what is and what is not deductible, read IRS Publication 502, Medical and Dental Expenses.
Whether to Itemize
There comes a time in every taxpayers life when he or she “graduates” from the 1040-EZ to the 1040 or 1040-A. If you're not sure whether to itemize personal tax deductions ask yourself this: Are you ready to pass up a tax cut? Because if you have enough expenses in the right areas, you can probably save yourself money by itemizing allowable federal tax deductions. The key is figuring out if your expenses in these categories add up to more than the standard allowance. If you paid mortgage interest, property taxes, medical expenses and/or made charitable donations, chances are you'll come out ahead when filing income taxes if you itemize rather than take the standard deduction.
IRA Contribution Limits
If you are hoping to net a tax cut by making a contribution to your individual retirement account (IRA), remember that there are maximum contribution limits for the purposes of personal tax deductions. Those maximums have been increased for 2005 to $4,000 (up from $3,000). As an added incentive, individuals who were at least 50 years old before the end of 2005 qualify to make an additional “catch-up” contribution of $500.
About Filing Status and Deductions
Filing status has everything to do with claiming federal tax deductions, whether you choose to take the standard deduction or itemize your personal tax deductions for your filing status. For example, if your filing status is single, your 2005 standard federal tax deduction is $5,000. Whereas, if your filing status is head of household, your 2005 standard federal tax deduction is $7,300. For more information on filing status and its impact on your deductions, read IRS Publication 17, Your Federal Income Tax, available at the IRS Web site.
Charitable Donation Deductibles
One of the prime ways tax-savvy individuals net themselves a tax cut is through charitable donations. Sure, giving to a charity is an altruistic act. People make donations to help others. That doesn't mean you can't help yourself in the process. If you donate cash or goods and services to a qualified charitable organization or drive on behalf of a charitable organization (to volunteer at their location, for example), you can claim these as personal tax deductions on your income tax return. There are several changes regarding charitable donations for tax year 2005, some driven by the aftermath of Hurricane Katrina. For example, cash contributions made after August 27, 2005, are not subject to the 50 percent adjusted gross income limitation and don't phase out for high-income taxpayers. Also, the mileage rate to provide services to a charity that assisted victims of Hurricane Katrina is $0.34 per mile. For all services to other charities, the mileage rate is $0.14 per mile. But remember to document those miles and keep any and all records of donations whether in the form of cash or goods and services.
State Sales Tax Deductibility
Thanks to the American Jobs Creation Act of 2004, taxpayers have the option in tax years 2004 and 2005 to garner a tax cut by claiming state tax deductions on Line 5 of Schedule A. State tax deductions that can be claimed are the higher of either state sales taxes or state and local income taxes paid. While these personal tax deductions are likely to be more beneficial to residents of states that have a sales tax but no income tax, if you live in a state with both income and sales tax and made big-ticket purchases during the year, you could come out ahead by claiming the sales tax deduction rather than the income tax deduction. Didn't save your sales receipts or don't feel like wading through a ream of them? Don't despair. IRS Publication 600, Optional State Sales Tax Tables, will help you figure out your allowed sales tax deduction in lieu of working off receipts.
Donating a Vehicle to Charity
Donating a vehicle to a charity is a great way to help those in need. However, tax rules about these donations changed for tax year 2005. You can donate an automobile or boat to a charity as always. If you claim the donation as one of your federal tax deductions, the claimed value is more than $500, and the charity sells the car, your maximum deduction is limited to the amount for which the vehicle sold. In the past, you could claim an amount equal to the fair market value of the vehicle based on comparative sales regardless of whether that amount was lower than, the same as, or more than the amount for which the charity actually sold the vehicle.
2005 Standard Deductions for Married Couples
Until 2003, married couples were actually penalized if they filed jointly. Known as the “marriage penalty,” married couples actually ended up paying higher taxes than if they filed as singles. Some incentive to get married, huh? The marriage penalty exclusion has been extended until 2010. For tax year 2005, the standard deduction if filing married-joint is $10,000. If you file married-single, your standard deduction is $5,000. Before you decide to claim the standard deduction, however, familiarize yourself with what expenses you may have that qualify as personal tax deductions. Generally speaking, if your itemized federal tax deductions exceed the standard deduction, you'll benefit from a tax cut—and that's money in your pocket.
State Income Tax Deductibles
If you itemize your deductions on Schedule A in pursuit of the prized tax cut, local and state tax deductions could prove to be a jackpot. State taxes that can be claimed as federal tax deductions include state sales taxes and local and state income taxes. However, you cannot deduct both types. Figure out for which type of state tax you paid the most—sales tax or state and local income tax—and deduct the higher of the two. This option applies only to 2004 and 2005 tax years as part of the American Jobs Creation Act of 2004.
2005 Mileage Rate
For the first time in its history, the IRS adjusted the standard mileage rate during the year to reflect increases in the price of gasoline that occurred in 2005 due to inflation and the impact of hurricanes Katrina and Rita. If you used a vehicle for business travel, the standard mileage rate for federal tax deductions is $0.405 for travel from January 1 to August 31, 2005 and $0.485 for travel from September 1 to December 31, 2005. Mileage can also be deducted if it was logged for medical reasons or as part of a deductible move. The mileage rates for these personal tax deductions are $0.15 from January 1 to August 31, 2005, and $0.22 from September 1 to December 31, 2005.
Mortgage Interest Deductibles
The home mortgage interest deduction is, for most people, the largest of the personal tax deductions claimed each year and can result in a sizable tax cut for most taxpayers. That's because the majority of your mortgage payment is applied to pay for mortgage interest with just a fraction of the payment—at least in the early years of a mortgage loan—applied to pay down the principal. The tax law around home mortgage interest deductions can be confusing as there are different rules regarding primary residences, second homes, home equity loans and lines of credit, and the deductibility of points paid to close a loan. Your best bet to determine how to maximize your home mortgage interest federal tax deduction is to consult with a tax preparer—especially if you're a first-time homeowner—or read IRS Publication 936, Home Mortgage Interest Deduction.
Tax Credits for Hybrid Cars
The spike in energy prices in 2005 spurred many manufacturers to introduce more hybrid vehicles than ever before. Aside from the desire to avoid being gouged at the gas pump, buyers of hybrids have been enjoying a hefty tax cut in recent years thanks to the clean fuel deduction. The deduction, which expired at the end of 2005, allows taxpayers to claim among their federal tax deductions a $2,000 deduction for the purchase of a new hybrid vehicle. The clean fuel deduction is being replaced in 2006 by a tax credit of up to $3,400 for the first 60,000 new energy efficient vehicles sold after January 1, 2006. The amount of the credit depends on the fuel-efficiency of the vehicle purchased.
