Hybrid Vehicle Tax Credits

Washington DC January 14, 2006; USA Today reported that the new U.S. energy bill also includes a new tax credit for buyers of hybrid cars, which combine an electric motor with an internal-combustion engine.

Starting next year, hybrid-car buyers will be eligible for tax credits ranging from $1,700 to $3,000. The credit will be tied to two components: hybrids that save the most fuel compared with 2002 models, and the vehicle's estimated lifetime fuel savings.

The credit will take effect Jan. 1, replacing the existing $2,000 tax deduction for hybrid vehicles. That deduction was scheduled to fall to $500 next year.

Because a tax credit is worth more than a deduction, the law provides a greater incentive to buy a hybrid after Jan. 1, according to an analysis by CCH, the tax publishing company.

But there's a potential penalty for waiting too long to buy. The law limits the tax credits to 60,000 vehicles from each automaker, so credits on popular models could disappear well before the tax break expires at the end of 2009.