Driving Expectations

What can drivers expect in 2005? From creative financing to higher insurance rates, here's a roundup of the good -- and the bad.

CAR DRIVERS CAN EXPECT to encounter twists and turns in 2005. Some will be exhilarating -- such as the thrill of greater tax savings and better lease deals. Others will be about as enjoyable as a speeding ticket, as drivers can expect to pay more for auto insurance and gas this year. Here's a breakdown of the good and the bad:

The Good News

1. Tax Break Extended for Hybrid Vehicles
This year you can be kind to the environment and your 2005 tax bill by purchasing a hybrid car (i.e. one that can run on electricity as well as gasoline), like the Toyota Prius.

Thanks to the Working Families Tax Relief Act of 2004 the full $2,000 clean-burning fuel deduction has been extended through 2005. (Before the extension, the deduction was only supposed to be worth $1,000 this year.) That means if you buy a qualified hybrid car or truck (the 2005 Ford Escape Hybrid is now certified) in 2005 you can take a $2,000 deduction to help offset the slightly higher cost of these vehicles. This deduction is available to all taxpayers, even those who don't itemize their returns.

Don't delay: This deduction shrinks to $500 in 2006 and phases out entirely in 2007.

2. An Increased Standard Mileage Rate
Road warriors rejoice: In 2005, the IRS increased the standard mileage rate used to compute the deducible costs of operating an automobile for business purposes. So if your employer doesn't reimburse you for using your own car for work-related driving you can now deduct 40.5 cents a mile, up from 37.5 cents a mile in 2004. The standard mileage rate was increased to reflect the higher costs associated with owning a vehicle, including costlier gas prices, purchase costs and insurance rates.

3. Improved Car Leasing Deals
Leasing is back. Many experts predict that 2005 will be an excellent year to snag a great deal on a leased vehicle. After a number of years of pushing aggressive financing incentives on new car purchases, manufacturers are now starting to back off that strategy and shift more of their marketing budget to leases, says Michael Kranitz, CEO of LeaseWizard.com. Sadly, manufacturers could only afford to subsidize those 0% financing deals for so long, he says.

The silver lining is that consumers will now see better terms on leases. Kranitz anticipates some of the most attractive deals being found on sport utility vehicles. That's because sales of SUVs are expected to slow down due in part to a reduction in the previously generous tax break that applied to the purchase of some vehicles by small businesses (more on this below).

As always, shoppers need to do their homework before signing on the dotted line. Dealerships have some wiggle room on the rate at which they lend you money -- known in the industry as "the money factor" -- so you need to be a savvy consumer. At LeaseWizard.com, you can get an auto-lease and loan-analysis kit along with six lender quotes for $34.95. Our two leasing calculators can also help you determine whether you're really getting a good deal.

4. Auto Manufacturers Are Getting Creative with Incentives
Zero percent financing is so last year. For 2005, manufacturers plan to grab consumers' attention by offering more creative incentives. Volkswagen, for example, is currently offering to pay a driver's auto insurance for one year on all Golf, Beetle, or Beetle convertible purchases. So far the program is only available in Illinois and Wisconsin, but if it's a success, drivers can expect it to be rolled out across the country, says Michael Chung, pricing and market analyst for automotive Web site Edmunds.com.

Drivers can expect to see more unusual incentives rolled out in late February and March when auto sales start to pick up, says Chung.

The Bad News

1. Expect Higher Used Car Prices
Thanks to a slowdown in leasing over the past few years, buyers can expect to find fewer coveted certified used cars on the market this year. And with supply down, prices are expected to rise, says Art Spinella, president of CNW Marketing Research, a Bandon, Ore.-based company that tracks certified used cars.

At its peak, there were 5 million leased vehicles returned to the market, Spinella says. That number has dropped significantly, thanks in part to fewer people leasing vehicles and instead taking advantage of attractive financing deals. In 2004, 2.9 million used leased cars were returned to the market. Spinello anticipates there will be just 2.7 million in 2005 and 2.5 million in 2006.

2. Driving Will Be Most Costly
If there is one thing drivers can count on, it's higher insurance rates and gas prices. According to Runzheimer International, a Rochester, Wis.-based firm that tracks automobile costs, auto premiums jumped about 6% over the past year, and the firm anticipates these increases will continue through 2005. Gas prices will also continue to squeeze drivers' wallets. While crude prices have come down a bit from a high of $55 a barrel, the government's Energy Information Administration still anticipates the average price for regular unleaded gasoline could hit $1.94 a gallon this summer. That's two cents higher than last year.

3. The IRS Is Cracking Down on Donated Vehicles
It just got a lot harder to donate your old clunker to charity. It used to be that you could give your used car to the non-profit of your choice and simply deduct the Kelley Blue Book value. Not anymore. Thanks to the American Jobs Creation Act of 2004, if the claimed value exceeds $500 and the item is sold by the charitable organization, the taxpayer is now limited to the gross proceeds from the sale. The organization is required to provide the donor with a sales receipt within 30 days. Only in cases when the charity ends up using your car or materially improving it can you deduct the vehicle's market value.

4. Skimpier Tax Breaks for SUV Drivers
The American Jobs Creation Act of 2004 also slashed the expense limit for heavy SUVs. That's bad news for business owners who got used to very generous write offs. Businesses are now only allowed to deduct in the first year up to $25,000 for certain sport utility vehicles. The business will have to depreciate the rest of the remaining cost, according to the IRS. The previous limit had been a whopping $100,000 and helps explain the big spike in SUV sales last year, says Edmunds.com's Chung.