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 dollar-for-dollar basis. Consequently, a $2,000 deductions saves a person in the 30% federal tax bracket $600 in taxes, and a $2,000 credit saves $2,000.  However, since the basis must be reduced by the amount of the credit, business use vehicles will realize a benefit less than the amount of the tax credit.  For a business in the 30% tax bracket, the net benefit would be $1,400.

However, figuring how much of a credit a hybrid-car buyer might receive starting in 2006 is a bit of a trick, and in some cases will be a moving target.  Under the new law, each hybrid car will qualify for two credits.  The first credit is based on how many more miles the hybrid gets to the gallon than a similar standard-fuel vehicle.  The second credit, a conservation credit, is added on top of the first credit.  In addition, the credit is reduced after an automaker has sold 60,000 hybrids.

Used and Leased Vehicles
A consumer that leases a hybrid vehicle is not eligible for the credit.  The credit is allowed to the vehicle owner, including the lessor of a vehicle subject to lease.  That means that lessor (the person who leases the vehicle to the consumer) is the person who can claim a credit for the vehicle.

A credit for a hybrid vehicle can only be claimed by the original purchaser of the vehicle, that is, the purchaser of a new vehicle.  The credit does not apply to a used hybrid vehicle.

The Credit and the Alternative Minimum Tax
The Alternative Motor Vehicle Credit cannot be used to offset the Alternative Minimum Tax (AMT).  A taxpayer cannot claim the credit unless the taxpayer's regular tax liability exceeds the taxpayer's AMT liability.

Even if a person is not subject to the AMT, he may not be able to claim the maximum allowable credit, or any credit, for the qualified vehicle that is purchased.  The amount of the credit that one can claim depends on the particular facts and circumstances.

For example, A, B and C each purchase the same make, model, and model year of a qualified hybrid motor vehicle to use as their personal vehicles.  At the time that A, B and C purchase their vehicles, the maximum allowable credit for the vehicle is $3,150.  A, B and C each have regular tax of $12,000 for the taxable year in which they purchase their vehicles.  A's tentative minimum tax is $8,000, B's tentative minimum tax is $11,000, and C's tentative minimum tax is $12,000.  Because A's regular tax ($12,000) exceeds A's tentative minimum tax ($8,000) by $4,000, A can claim the maximum credit allowable for the qualified hybrid vehicle that A purchases.  Because B's regular tax ($12,000) exceeds B's tentative minimum tax ($11,000) by only $1,000, B can claim a credit of only $1,000 for the qualified hybrid vehicle that B purchases.  Because C's regular tax ($12,000) does not exceed C's tentative minimum tax ($12,000), C cannot claim any credit for the qualified hybrid vehicle that C purchases.

Also if you claim the credit as a personal credit, the tax code limits the amount of the credit that you may claim to the amount of your regular tax liability.  Therefore, if your regular tax liability is zero, the amount of the credit for which you are eligible will be zero.  The credit cannot be used to reduce your regular tax liability below zero, and cannot be carried forward or back to another taxable year.

Hybrids will qualify for the fuel economy credit based on the following table:

The 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.  The credit schedule is as follows:

Credit Phase-Out depends on Vehicle Sales
After a manufacturer has sold 60,000 vehicles (of all models) the credit will start to shrink, eventually to zero.  After reaching the 60,000 limit, the phaseout period begins.  The phaseout period is defined as the period beginning with the second calendar quarter following the calendar quarter which includes the first date the number of qualifying vehicles exceeds 60,000.  The credit falls to 50% for the first two quarters of the phaseout period, 25% for the 3rd and 4th quarters of the phaseout period, and to 0% for each subsequent quarter.  The only manufacturer for whom the credit had been limited in the 2006 tax year is Toyota Motor Sales, USA, which includes Lexus.  See the table below for the credit amount and purchase date limitations for various models of Toyota and Lexus.

Eligible Vehicles

As of January 31, 2007 the Internal Revenue Service had acknowledged the manufacturers' certifications of the following hybrid vehicles (arranged by model year) and credit amounts: