Drivers of hybrid vehicles enjoy reduced fuel costs and environmentally harmful emissions; they may also qualify for federal income tax credits that partially offset the higher purchase price of a hybrid. Although credits for many hybrids have expired, at the time of publication buyers of new plug-in hybrid-electric vehicles -- PHEVs -- can receive a credit of up to $7,500.
PHEVs contain both a conventional gasoline engine and an electric motor, which draws its power from a high-capacity battery. Like traditional hybrids, these vehicles can charge their batteries through their motion, but they can also be charged by an external power source such as a wall outlet. The battery capacity determines the amount of the federal incentive; batteries with higher capacities earn larger credits. For example, the 2012 Fisker Karma sedan, with a battery capacity of 20 kilowatt hours, qualifies for a credit of $7,500, while the 2012 Toyota Prius Plug-In hybrid, with a capacity of 4.4 kilowatt hours, qualifies for a credit of $2,500. The credit for the middle-capacity 2013 Ford C-Max Energi is $4,007.
Expired Hybrid Credits
Incentives for conventional hybrids, which charge their batteries only through their motion and cannot be plugged into a power source, expired on December 31, 2010. However, taxpayers filing amended returns for the period between December 31, 2005 and the end of 2010 can still claim credits for these vehicles. These credits were gradually phased out hybrid vehicles became more popular, so a purchaser of a hybrid in 2006 qualified for a larger credit than someone who bought the same hybrid in 2008. For example, a 2007 Toyota Prius was eligible for a credit of $3,150 in early 2006 but for only $787.50 in late 2007.
Electric Vehicle Credits
Although not hybrids in the strict sense of the term, all-electric vehicles share many of the same environmental benefits and can also qualify for federal income tax credits. These vehicles operate entirely using an electric motor, and incentives for their purchase, like those for PHEVs, are tied to battery capacity. Every all-electric vehicle that currently qualifies for the incentive, from the 2011 Nissan Leaf to the 2011 Tesla Roadster, is eligible for the highest possible credit of $7,500.
Credit vs. Deduction
The tax implications of an income tax credit are much more favorable than another commonly used incentive, an income tax deduction. A deduction decreases the amount of taxable income, while a credit is taken off an individual's actual tax liability. A credit of $7,500 is therefore worth much more than a deduction of the same amount.
Check the federal Fuel Efficient Vehicle Tax Incentive Information Center, referenced below, for the current status of incentives.