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Big new tax breaks for hybrid cars

Starting next year, buying a fuel-efficient vehicle will help keep IRS at bay.

January 2, 2006; Posted: 10:02 p.m. EST (0302 GMT)

By Peter Valdes-Dapena, staff writer
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NEW YORK ( - If you just bought a brand new fuel-efficient hybrid vehicle, sorry but you should have waited.

Starting Jan. 1, 2006, buyers of some hybrid vehicles can get a hefty tax credit. But the credits vary a lot and some very fuel-efficient vehicles still get no credits at all.

In some cases, though, the credits are large enough to almost entirely make up the additional cost of the hybrid vehicle as compared to a non-hybrid. That means any money you save on gas will actually go directly into your pocket.

Previously, some hybrid vehicle purchases have been eligible for tax deductions. The new credits, however, are subtracted directly from the money you owe the IRS. That makes these credits much more valuable than deductions.

Even though the new tax law covers diesels as well as hybrids, no diesel vehicles will get tax credits in spite of the fact that some get extremely high gas mileage, according to an analysis by the American Council for an Energy Efficient Economy.

The Internal Revenue Service has not officially said, yet, what the tax credits will be, but the ACEEE based its figures on what is currently known about 2006 vehicles and the wording of the law.

The amount of the credit for each vehicle is based on three factors:

First, how large is the vehicle? The amount of the credit is based on the vehicle's fuel economy as compared to a similar 2002 model-year vehicle. To get any credits at all, a vehicle must get at least 25 percent better fuel economy than a similar 2002 vehicle.

A vehicle could also get a smaller credit if it is estimated to save at least 1,200 gallons of fuel over its lifetime.

Vehicles also must meet certain emissions standards to qualify for a tax credit. Regardless of their fuel economy, no diesel vehicles currently meet the emissions requirement for a tax credit.

Check our gallery for examples of cars with credits

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