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 for hybrids and clean diesels, or $4,000 for alternative fuels — as incentives for Americans to reduce their gas dependency.
Credits are offered on vehicles that get more than 25 percent better fuel economy than comparable gas-powered models. This credit is applicable to vehicles 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 Fusion and Mercury Milan 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. And as of January 2009, all of Honda's tax credits have been phased out.
The credit is written in such a way that a buyer will get more money for a more fuel-efficient hybrid or clean-burning diesel. 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. Buyers also get a credit based on anticipated fuel savings. Altogether, the credit can add up to a maximum of $3,400.
In the case of alternative fuels, vehicles can qualify for a credit of up to $4,000. Eligible alternative fuels include natural gas, propane, hydrogen, or any blend that's at least 85 percent methanol.
The newest vehicles to qualify for federal tax credits are plug-in hybrids and fully electrical vehicles. The Tesla Roadster is the first vehicle eligible for the maximum federal tax credit of $7,500. The upcoming Chevrolet Volt is expected to follow.
To see the specific vehicles that qualify, and amount of available tax credit for all hybrids and alternative-fuel vehicles, visit Edmunds.com's Federal Tax Credits for Hybrids and Alternative Fuel Vehicles page.
Tax credits can also be earned by installing an aftermarket conversion kit that repowers a gasoline car to use an alternative fuel. Companies such as Roush sell new vehicles that have been converted to burn clean alternative fuels, qualify for a tax credit, and are backed by the original manufacturer warranty.
Note that tax credits are only available to the original owner. If you buy a used hybrid, you will not be able to claim any credits or deductions. Please consult a tax professional to see if you qualify.
The federal government isn't the only source of hybrid and 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.
