What are the Tax Credits?

Under the Energy Policy Act of 2005, the tax credit you get depends on the type of vehicle you buy. But a few rules apply to all hybrids and AFVs:

  • You must be the original owner of the car. A used car doesn't count.
  • You must buy the car to use it -- not to resell it. (Otherwise people could just flip cars for the tax credit.)
  • The car must be used in the U.S.
  • You need to buy and start using the car between Jan. 1, 2005, and Dec. 31, 2010. (That means that if you bought a hybrid or AFV a while ago and never claimed the credit, you can file an amended tax return and maybe get a refund.)
  • You need to submit IRS form 8910.

If you buy an AFV and meet the criteria above, you qualify for a $4,000 tax credit [source: EPA]. If you have an AFV that you bought and started using before Jan. 1, 2005, you still may be able to get a $2,000 tax deduction [source: EPA].

Hybrid tax credits and other incentives are a little more difficult to calculate. That's because the government not only wants you to buy hybrids, but also wants to encourage carmakers to produce them. After a company has sold 60,000 hybrid models, the tax credits start to phase out. That means that if you're considering a hybrid, it may pay to go with a carmaker that's new to the hybrid game. Right now the only carmakers that have had the phase-outs begin on their vehicles are Honda and Toyota.

Honda and Toyota hybrids have sold successfully.
Stan Honda/AFP/Getty Images
Honda and Toyota hybrids have sold successfully.

The tax credits for buying a hybrid aren't as great as for AFVs. That's because hybrids still use gas -- they just don't use as much as regular cars. Hybrid tax credits are also based on how fuel-efficient the hybrid is. For example, a two-wheel drive Ford Escape Hybrid gets a larger credit than a four-wheel drive Ford Escape Hybrid because the four-wheel drive system adds weight, which increases the car's gas consumption.

While hybrids that meet the criteria above are eligible for a tax credit of up to $3,400, most aren't efficient enough to qualify for the full amount (the Toyota Prius comes the closest, qualifying for a $3,150 tax credit). What they do qualify for varies by model. The Environmental Protection Agency (EPA) has a list of models that qualify and the amount each qualifies for [source: EPA]. If you bought a hybrid and put it into service before Jan.1, 2005, you can still qualify for a $2,000 tax deduction [source: EPA].

Cars and . . .dishwashers?
Energy efficiency doesn't stop with your car. If your fridge is on the fritz, you can replace it with an energy-efficient model and get a tax credit. If you're remodeling, you can also get a credit for using energy-efficient materials. Models and materials that qualify are usually marked at the store, so keep that in mind as you shop.

To learn more about AFVs, hybrid cars and different types of taxes, look over the links on the next page.