Tax Breaks for Green Cars

Buying & Leasing a Car

Tax Breaks for Green Cars

In the eyes of Uncle Sam, not all eco-friendly cars are equal. Find out how much money you're allowed to write off on your tax return.

In 2006 Uncle Sam began offering more-generous tax breaks -- a dollar for dollar credit to your tax bill -- to hybrid buyers and buyers of other alternative-energy vehicles. Some states and local governments also offer incentives (including sales-tax breaks and solo driving in HOV lanes).

Based on fuel economy, the federal tax break ranges from a one-time credit of $250 for the two-wheel-drive Chevy Silverado and GMC Sierra pickups -- which improve gas mileage only 10% to 15% -- to $3,000 for the 2wd 2008 Ford Escape, Mercury Mariner and Mazda Tribute hybrids.

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The Toyota Prius used to top the tax credit list, but Congress in its inscrutable wisdom limited the full credit for hybrids to the first 60,000 vehicles sold by a manufacturer. In the phaseout of the break, credits for Toyota and Lexus hybrids have been halved and halved again. If you buy a Prius before October 1, 2007, you'll be eligible for a $787.50 credit. After that, you get nothing. Honda hybrid credits will be halved after December 31, 2007. For a complete list of credits, go to the Department of Energy's Web site.

The Honda GX, which runs on compressed natural gas, is eligible for a $4,000 tax credit, and you may be eligible for another $1,000 off if you buy a home gas dispenser. The credit for electric vehicles expired at the end of 2006.

When it's time to do your federal income taxes, you calculate the credit on Form 8910 and enter it on line 55c of Form 1040. Unfortunately, the credits don't count against the alternative minimum tax, but the energy bill moving through Congress would change that for 2007.