OVERVIEW
The federal government imposes taxes on a variety of fuels. The one most familiar to taxpayers is probably the federal gas tax—18.4 cents/gallon as of 2021—which pays for road projects across the country. Certain uses of fuels are untaxed, however, and fuel users can get a credit for the taxes they’ve paid by filing Form 4136.
Untaxed uses of fuels
Not all fuels are taxed by the federal government. There are a variety of circumstances where the government may not tax or implement reduced taxes, including the following:
- Business use of gasoline in a vehicle that is not registered for highway use
- Exported gasoline
- Gasoline and kerosene used in commercial aviation
- Undyed diesel fuel used in farming or for some bus transportation (Undyed diesel is taxed; Diesel that has been dyed red is typically untaxed)
Who qualifies for the credits?
It would be impractical to set up separate gas stations and fuel depots all over the country to sell different taxed and untaxed fuels, so the government essentially taxes all fuels with a few exceptions (dyed diesel, for example), then allows credits for nontaxable uses.
In general, only the “ultimate user” of a fuel is eligible for a credit for untaxed use. In other words, if you weren’t the one who burned the fuel, then you usually can’t claim the credit.
How to use Form 4136
The form lists dozens of uses in which fuel taxes either don’t apply or are reduced. For each one, you enter the number of gallons used for that purpose, then multiply by the per-gallon rate listed on the form.
For example, say you used 1,000 gallons of undyed diesel for agricultural purposes on a farm. You would enter 1,000 in the space provided for that particular use, multiply it by the credit rate of 24.3 cents/gallon to get a credit of $243. On the final line of the form, you add up all the credits.
The value of tax credits
The tax credits calculated on Form 4136 directly reduce your tax obligations. If you have $243 worth of credits, for example, that cuts your tax bill by the full $243. Tax credits are more powerful than tax deductions, which simply reduce the amount of your income that’s subject to tax. If you were in the 25% tax bracket, for example, and got a $243 deduction, that would only cut your tax by approximately $60.
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