By DAVE CHESS
6:00 am, August 22, 2006

Even though April 15 has come and gone, it’s not too soon to consider the tax-saving advantages that come with buying a fuel-efficient vehicle. Purchasers of new hybrids are eligible for up to $3,400 in tax credits under the Energy Policy Act of 2005.

Dollar for dollar, a tax credit is much better than a tax deduction. A deduction reduces taxable income while a credit directly reduces your tax bill. A $3,400 deduction in the 28 percent tax bracket saves just $952, compared to a full $3,400 savings with the tax credit.

But if you’ve ever prepared your own tax return, you know the IRS will somehow complicate the process. The actual amount of credit depends on not only the type of car you buy, but on when you buy it, and on the number of hybrids already sold by the manufacturer of your hybrid.

To receive full credit you have to purchase the new hybrid no later than the end of the calendar quarter that occurs after the calendar quarter in which the hybrid manufacturer sold its 60,000th hybrid. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, the credit drops to 50 percent. For the fourth and fifth calendar quarters, the credit is 25 percent.

So far Toyota (and its Lexus luxury division) is the only manufacturer to sell 60,000 hybrids this year; the company hit that number by the end of May. That means buyers hoping to get 100 percent credit on a Toyota or Lexus hybrid must complete the purchase by Sept. 30.

We won’t be surprised if hybrid makers that have not hit the magic 60,000 hybrid sales number begin touting their 100 percent tax-credit advantage after Sept. 30 when Toyota’s credit slips to 50 percent. Honda and Ford should have a tax-credit advantage for the rest of the year.

One more piece of fine print: Your hybrid may qualify for the credit, but depending on your type and level of income, the credit might be nixed by provisions of the Alternative Minimum Tax.

Best advice: If you want to buy a hybrid, do it as soon as possible—and bring your CPA to the dealership with you.
Hybrid credits

2007 Toyota Camry Hybrid — $2,600
2005 Toyota Prius — $3,150
2006 Toyota Prius — $3,150
2006 Toyota Highlander Hybrid — $2,600
2007 Lexus GS 450h — $1,550
2006 Lexus RX 400h — $2,200
2006 Ford Escape Hybrid FWD — $2,600
2006 Ford Escape Hybrid 4WD — $1,950
2006 Mercury Mariner Hybrid 4WD — $1,950
2005 Honda Insight CVT — $1,450
2006 Honda Insight CVT — $1,450
2005 Honda Civic Hybrid MT and CVT — $1,700
2006 Honda Civic Hybrid CVT — $2,100
2005 Honda Accord Hybrid AT and Navi — $650
2006 Honda Accord Hybrid AT* — $1,300
2006 Honda Accord Hybrid AT and Navi** — $650
*With updated calibration and Navi
**Without updated calibration
Source: Internal Revenue Service