President Bush signed an energy bill in late 2005 that provides generous tax credits to people who buy new hybrid automobiles and other fuel-efficient vehicles starting Jan 1, 2006. Credits will decline after a car manufacturer has sold 60,000 hybrids under the new program, so buyers might have to act quickly to get the benefit. The credits vary by model and will be based on two things: how much more fuel efficient the car is compared with an average 2002 car of the same weight class and how much gasoline the car will save over its lifetime compared with a baseline car in the same weight class. The latter provision will let some hybrid SUVs qualify for a tax credit, even though they guzzle more gas than smaller conventional cars that get no tax credit.
The credits expire after 2010 for most vehicles. Some of the credits are $600 for a Honda Accord Hybrid and $3,150 for a Toyota Prius. For most people, the credit, which reduces taxes dollar for dollar, will be more valuable than the existing $2,000 deduction, which reduces income before taxes. A $2,000 deduction reduces most people's tax bill by $500 to $700. A $2,000 tax credit will cut a tax bill by $2,000. The credits will apply to HEVs, vehicles powered by fuel cells, advanced "lean burn" diesel and other alternative power sources. Both diesels and hybrids must meet certain emissions standards to qualify for the credit. Additional economic advantages of some of the hybrid vehicles include use of carpool and HOV (high occupancy vehicle) lanes and parking free at downtown meters and in city lots.
