Buying a hybrid? Waiting may cost you

Credits for fuel-cell vehicles

Qualified fuel-cell vehicles include, for example, cars that run on hydrogen cells. The maximum credit for these types of vehicles can be as high as $12,000. But it won't last forever. Unless Congress extends it, the credit will vaporize after 2014.

In the meantime, the size of the credit is whopping enough to grab your attention, but your options are extremely limited. The IRS has certified only one vehicle so far, the 2006 Honda FCX, which is eligible for the $12,000 credit. Stay tuned to find out if and when the list will be expanded.

Credits for lean-burn-technology vehicles

Cars and trucks that use lean-burn technology and qualify for tax credits have internal-combustion engines that use a direct injection of a fuel mix with a higher-than-normal percentage of air. Some new diesel cars that will soon be introduced in the U.S. may qualify. We'll have to wait and see, however, because ultrastrict emission-control standards must be met to qualify for this credit.

• Video: How hybrid vehicles work

Also on the horizon is the anticipated arrival of European and Japanese diesel models, which have been taking off across the pond. They're expected to achieve far better fuel economy without sacrificing much performance -- unlike some of the early hybrids, which on steep grades can be passed by a person walking at a brisk pace.

The minimum credit for a lean-burn vehicle is $250; the maximum possible is $3,400. Those credits, which will disappear after 2010 if Congress doesn't extend them, are subject to the same phaseout rules as the hybrid-vehicle credits. So the credits will be reduced and eventually disallowed after a manufacturer has sold 60,000 qualifying lean-burn vehicles.

There's little cause for concern now because the IRS hasn't certified any vehicles as eligible for the credit. Once again, stay tuned.

Bad news for AMT victims

One last need-to-know fact: You will be stiffed out of all or part of your rightful vehicle tax credit if you get hooked by the dreaded alternative minimum tax (AMT) for the year you buy the vehicle. Why? Because none of the credits explained in this article can be used to reduce an individual taxpayer's federal income-tax bill below his or her AMT liability amount (reduced by certain other credits).

If this ticks you off, write to your lawmakers to demand the repeal of the AMT.

This article was reported and written by Bill Bischoff for SmartMoney.

Published Sept. 13, 2007

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