Energy Tax Breaks require accounting trickery

If you're hoping to cash in on those new tax breaks in the Federal Energy bill, you'd better take your accountant with you cars hopping.

Some of the biggest tax incentives are for buyers of hybrid cars — which typically use both electric and gasoline power — and "alternative fuel" vehicles. Current tax law provides these buyers with up to $2,000 in tax deductions. The new law will replace the deductions with tax credits that can reach $3,400.

Tax credits are significantly more valuable than deductions because deductions merely reduce the amount of income that's subject to tax, but a credit reduces the tax owed on a dollar-for-dollar basis. Consequently, a $2,000 deduction saves a person in the 30% federal tax bracket $600 in taxes, and a $2,000 credit saves $2,000.

However, figuring how much of a credit a hybrid-car buyer might receive next year is a bit of a trick.

Under the new law, each hybrid car will qualify for two tax credits. The first credit is based on how many more miles the hybrid gets to the gallon than a similar standard-fuel vehicle.

Hybrids that are only 25% more fuel-efficient than a standard car will qualify for a $400 "fuel economy" credit. Those more than 50% more fuel-efficient qualify for an $800 credit, and those that are 250% more fuel-efficient will get a $2,400 credit.

A "conservation" credit is added on top of the fuel economy credit. This credit is aimed at providing a payback for the car's lifetime fuel savings. This credit ranges from $250 to $1,000 per car.

Theoretically, a car that qualifies for the maximum of both credits would allow its buyer to cut his federal income tax bill by $3,400: $2,400 for the fuel economy credit plus $1,000 for the conservation credit.

Manufacturers, the IRS and possibly the Environmental Protection Agency are expected to work out the details on which cars get which level of tax breaks, manufacturers say. But no one is quite sure how much of a break any individual car will qualify for.