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Hybrid Extra Credit

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author photo by Larry E. Hall June 2008

If gasoline cresting the $4 per gallon mark has finally tipped the scales in favor of buying a hybrid vehicle, you should know that the pump may not be the only place you can save money. Certain hybrid vehicles are still eligible for a federal tax credit. Unlike a tax deduction, tax credits are more valuable because they directly reduce the amount of federal tax you owe. You'll need to do some research to see if the particular hybrid you are considering will reduce your 2008 tax bill.

Check the Fine Print
A provision in the Energy Policy Act of 2005 allows a tax credit for buyers of approved gasoline-electric hybrid vehicles. The incentives began in January 2006 and end in December 2010. Sounds simple, but like most federal programs, you'll need to read the fine print. First off, not all hybrid vehicles qualify for the same credit amount.

The credit, which favors more efficient vehicles, is based on a formula that includes fuel economy, reduced emissions and lifetime fuel savings for each model. This means the credit for full-size SUV hybrids such as the Chevy Tahoe or GMC Yukon is less than those for smaller SUVs such as the Ford Escape Hybrid and its cousin, the Mercury Mariner Hybrid.

60,000-Car Cutoff
Another hitch in the fine print is the limited number of tax credits per manufacturer. The full tax credit begins to diminish after the first 60,000 hybrid vehicles an automaker produces. The first phase-out reduces the credit by 50 percent, then that amount is reduced by 50 percent and finally the credit vanishes.

Since the 60,000 units apply to all hybrid vehicles sold by each auto manufacturer - not each model - there are no longer tax credits available for any Toyota or Lexus products. This includes the popular Prius, because Toyota hit the 60,000 mark back in May 2006.

Honda reached the 60,000-vehicle limit last year, meaning the full $2,100 credit for the Civic Hybrid expired at the end of 2007. But if you hurry and take delivery of a 2008 Civic Hybrid before the end of June, you may still be eligible for a $1,050 tax credit. Beginning July 1 through December 31, that credit is reduced to $525. If you wait until January 1, 2009, or later to purchase the Civic, the credit will be gone.

An extremely important detail of the credit amount is determined according to when you take delivery of the vehicle, not when you order it. For example, if you order the Civic Hybrid on June 30 and take delivery the next day, July 1, you will only receive a $525 credit, not $1,050. Also, if you typically lease your vehicles, lessees cannot claim the hybrid tax credit. The leasing company receives the credit, and it would be up to them to pass along a discount to you on the money they saved.

Available Credits
Ford is the next car company that will reach the magic 60K number, most likely later this year. Until then, the full credit for both the Escape and Mariner hybrid models are intact: $3,000 for two-wheel-drive (2WD) models; $2,200 for four-wheel-drive (4WD) versions. The same credits also apply to Mazda's 2008 Tribute Hybrid, which is a mechanical clone of the Escape and the Mariner.

For GM products, both 2WD and 4WD versions of the Tahoe and Yukon have a $2,200 credit. Saturn's Vue Green Line SUV earns a $1,550 credit; the Aura hybrid sedan and its Chevy Malibu Hybrid cousin qualify for a $1,300 credit. Though only available in eight states, the Nissan Altima sedan carries a $2,350 tax credit.

Before the end of summer, Chrysler will offer two new, full-size hybrid SUVs, the Chrysler Aspen and Dodge Durango. The Internal Revenue Service has not yet issued the tax credit amounts, but they should be very similar to those offered on the Tahoe and Yukon twins since they incorporate similar hybrid power systems.

AMT Washout
Even if you purchase a credit-qualified hybrid, it's possible you will receive a smaller credit or none at all thanks to the Alternative Minimum Tax (AMT). Initially enacted to impede the wealthy from using loopholes and deductions to avoid taxes, the AMT has expanded to additional income levels over the years because it is not indexed for inflation. If Congress doesn't enact changes, this parallel tax system can diminish your hybrid credit, even if you don't owe the AMT. Be sure to consult a tax specialist to see if you qualify for the hybrid credit.

Other Incentives
Even if you don't qualify for a federal credit, you still might be eligible for a tax credit or another incentive from your state or local government. Programs vary by locale, and the Department of Energy's Alternative Fuels and Advanced Vehicles Data Center is a valuable resource. It lists Web links and phone numbers to help confirm if regional incentives are still applicable.

Beyond rebates, several states allow hybrids to drive with no passengers in high-occupancy vehicle (HOV) lanes, while others have eliminated emissions testing. A growing number of cities and towns have implemented free or reduced parking fees for hybrids, as have several colleges and universities.

Many private companies also offer employee incentives (anywhere from $1,000 to $5,000) if they purchase a hybrid vehicle. Others provide free parking to both employees and customers. Also, be sure to check with your insurance company - you could receive up to 10 percent off your premium.

Even as tax credits are phased out, with gas topping $4 a gallon a hybrid's reduced emissions and improved fuel economy may be all the incentive you need.

Larry Hall is the editor of Northwest Auto News Service and a freelance journalist based in Olympia, Wash. For more than 20 years, he's covered the automotive industry for numerous trade journals, newspapers and business publications.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
Hybrid Extra Credit - Autotrader