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TAX TIP No. 33
Tax breaks for gas savers

Green could have a double meaning for environmentally conscious motorists at tax time. Buyers of an alternative-fuel vehicle could find themselves saving money when they file their taxes.

In this tax tip:

The Energy Policy Act of 2005 created a series of tax credits for four categories of fuel-efficient vehicles: advanced lean burn, fuel cell, alternative fuel and hybrid -- the most popular type and the one that offers the most credit opportunities.

Hybrids are the most popular type of energy-efficient vehicle, but several other automotive options can save gas and tax dollars.

Options for alternative-fuel vehicles:
Advanced lean burn technology vehicles have an internal combustion engine that incorporates direct injection and is designed to operate using more air than is necessary for complete combustion of the fuel.
Fuel cell vehicles are fueled by one or more cells that convert chemical energy directly into electricity by combining oxygen with hydrogen fuel.
Alternative-fuel vehicles run on compressed or liquefied natural gas, liquefied petroleum gas, hydrogen or any liquid that is at least 85 percent methanol.
Hybrid vehicles combine a gasoline combustion engine and a rechargeable electric energy storage system.

Individuals who buy an eligible alternative-fuel auto could take advantage of a nice tax credit. Just how much, however, depends on the type and make of vehicle purchased.

Following credit fluctuations
The tax credit was welcomed by taxpayers, who previously were allowed only a deduction for buying an environmentally friendly auto. A deduction reduces taxable income, which generally produces a lower tax bill.

But with a credit, once you determine what you owe, the credit directly cuts your tax bill. It might even wipe out any taxes you owe. In essence, credits are more valuable tax breaks than deductions, since credits reduce your tax bill dollar for dollar.

However, the application of the new alternative-fuel vehicle credit is not as welcome as one might think for several reasons.

First, there is no set tax credit amount. The tax savings range from several thousand dollars to just a couple hundred. Precisely how much you can subtract from your final IRS bill depends on which eligible vehicle you buy.

In addition, the list of IRS-certified vehicles is not fixed. As automakers produce qualified vehicles, they will be added to the roll. So far, there are more than 40 hybrids and a handful of compressed natural gas vehicles that are credit qualified.

Finally, the credit amount of some alternative-fuel vehicles, notably hybrids, could be phased out and ultimately eliminated based on how many cars each automaker sells.

-- Updated: March 23, 2009
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