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Shift into gear for the new hybrid-vehicle tax credits

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in Small Business Tax

Are you in the market for a new passenger car? If you’re energy-conscious and you qualify, you can slice a few thousand dollars off your tax bill.

Strategy: Buy a hybrid vehicle that qualifies for the new energy credit. The credit, which was established by the Energy Tax Incentives Act of 2005, is available for qualified vehicles placed in service this year.

The new hybrid-vehicle credit effectively replaces the clean-air deduction on the books the past several years. That deduction, set at $2,000 for 2005, was scheduled to be cut down to just $500 in 2006. Instead, the new hybrid credit lets you keep as much as $3,400 in your pocket.

Here’s the whole story: Actually, four credits are available for vehicles placed in service after 2005. They are:

1. The qualified fuel-cell motor vehicle credit.

2. The advanced lean-burning technology vehicle credit.

3. The qualified hybrid motor vehicle credit.

4. The qualified alternative-fuel motor vehicle credit.

Those four credits comprise the alternative motor vehicle credit claimed on your personal return.

It’s expected that the hybrid motor vehicle credit will be the most popular of the four. The IRS must certify a particular make and model as being eligible for the credit.

How much is the hybrid-vehicle credit? It can range from $250 all the way up to $3,400, although, currently, the highest credit for an existing vehicle tops out at $3,150.

The computation is a combination of the mileage a particular vehicle saves over 120,000 miles and its fuel economy expressed as a percentage of the 2002 model year fuel economy for its weight class. The better the car’s performance, the higher the credit.

Fortunately, we’ve done the hard work for you. Consult the chart above right to find the credit amount for vehicles the IRS recently certified as meeting the required standards.

Note: The credit will gradually drop for the most popular models. Reason: Congress set up the law so that the credit begins to phase out in the second calendar quarter after the quarter in which at least 60,000 of the manufacturer’s qualified passenger automobiles and light trucks are sold.

So far, Toyota is the only automaker affected by the phaseout. For a Camry Hybrid or Prius bought after Sept. 30, 2006, the credit drops by half, to $1,575 and $1,300, respectively. Those figures will remain in place for vehicles bought through March 31, 2007.

After that, the credits will be cut in half again — to 25 percent of the original credit amount — before they completely disappear for vehicles bought after Sept. 30, 2007.

Tip: Don’t bet against a change in the law. The law penalizes the carmakers that offer the most energy-efficient choices.

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