Hybrid Cars

So you've researched the perfect hybrid or alternative-fuel vehicle, but it costs a good deal more than its conventionally powered cousin. There's good news, however, as the federal government offers large tax credits — up to $3,400 — as incentives for Americans to reduce their gas dependency.

In the case of hybrids, credits are offered on vehicles that get more than 25 percent better fuel economy than comparable gas-powered models. This credit is applicable to hybrids purchased on or after January 1, 2006.

There's a catch, of course. The full tax credit is only available until a manufacturer produces 60,000 hybrids; after that time, the tax credit is reduced and eventually phased out. For instance, since Ford's production hasn't reached 60,000 hybrids yet, Ford hybrid buyers will get the full credit. Toyota, however, surpassed 60,000 hybrids long ago, so Toyota and Lexus buyers no longer qualify for a tax credit, as it was already reduced and then phased out entirely.

The credit is written in such a way that a buyer will get more money for a more fuel-efficient hybrid. In essence, IRS guidelines state that a buyer will receive a $400 credit for every 25 percent improvement in efficiency their hybrid gets over the average car of its class and weight, based on the 2002 model year. Buyers also get a credit based on anticipated fuel savings. Altogether, the credit can add up to a maximum of $3,400.

The 2008 Ford Escape Hybrid and 2008 Mercury Mariner Hybrid, for example, come with a $3,000 tax credit for the two-wheel-drive versions and $2,200 for the less efficient four-wheel-drive models. (To see the specific amount of available credit for all hybrids and alternative-fuel vehicles, visit the federal government's Fuel-Efficient Vehicle Tax Incentives Information Center.)

For car owners who bought their hybrids in 2005, an older IRS ruling allows owners to claim a $2,000 tax deduction, rather than a credit. To see a list of qualifying vehicles, click here.

Note that tax credits and deductions are only available to the original owner or leaseholder. So if you buy a used hybrid, you will not be able to claim any of the credits or deductions available. Please consult a tax professional to see if you qualify.

The federal government isn't the only source of alt-fuel incentives. State and local governments, private companies and others are making it easier than ever to justify your fuel-conscious purchase. For full details on where to find incentives, see Finding Great Perks for Hybrid Buyers.