Which Cars Qualify for Alternative Fuel Credit?

So you're ready to buy a new set of wheels that gets better mileage. Good idea. The period between Labor Day and the end of the year is often the best time to shop for cars. And you can save even more if you buy a vehicle that's eligible for a federal income tax credit.

The way it works is this: The IRS has doled out tax credits for the first 60,000 qualifying vehicles sold by car manufacturer. Sadly, you can no longer claim a credit for a Toyota or Lexus hybrid, and the credit for the Honda Civic hybrid is about to go bye-bye. Still, several other hybrids still qualify and some brand-new diesel models do, too.

Remember that a buck worth of credit is much more valuable than a buck worth of deduction--because a credit reduces your federal income tax bill dollar for dollar. However, only new (not used) vehicles are eligible for credits, and you must buy rather than lease. Sadly, you may not collect any tax savings if you're a victim of the dreaded alternative minimum tax (see the sidebar).

The tax credit for qualified hybrids can range from as low as $250 to as high as $3,400 (although the IRS is yet to approve a credit for that maximum figure). Here's the current list of IRS-approved 2009 and 2008 hybrids, along with applicable credit amounts. More 2009 models will join the club as soon as they are certified by the IRS.

Ford and Mercury Hybrids
2009 Ford Escape 2WD -- $3,000
2009 Ford Escape 4WD -- $1,950
2009 Mercury Mariner 2WD -- $3,000
2009 Mercury Mariner 4WD -- $1,950

Chevy, GMC, and Saturn Hybrids
2008 Chevy Malibu -- $1,300
2008 Chevy Tahoe 2WD and 4WD -- $2,200
2008 GMC Yukon 2WD and 4WD -- $2,200
2008 Saturn Aura -- $1,300
2008 Saturn Vue Green Line -- $1,550

Ford and Mercury Hybrids
2008 Ford Escape 2WD -- $3,000
2008 Ford Escape 4WD -- $2,200
2008 Mercury Mariner 2WD -- $3,000
2008 Mercury Mariner 4WD -- $2,200

Honda Hybrid
2008 Honda Civic CVT purchased between 7/1/08 and 12/31/08 -- $525
2008 Honda Civic CVT purchased after 12/31/08 -- $0

Mazda Hybrids
2008 Mazda Tribute 2WD -- $3,000
2008 Mazda Tribute 4WD -- $2,200

Nissan Hybrid
2008 Nissan Altima -- $2,350

The tax credit for qualified lean-burn vehicles can also range from $250 to $3,400. These machines have internal combustion engines that use a direct injection of a fuel mix with a higher-than-normal percentage of air. Several recently introduced diesels qualify for lean-burn credits, and more are on the way because these vehicles (which are already popular in Europe) use a superior technology. Unlike hybrids, lean-burn diesels can achieve much better fuel efficiency without sacrificing much performance, and they don't have expensive and environmentally hazardous battery packs that eventually need to be replaced and disposed of. The only downside is that diesel fuel costs considerably more than gasoline right now.

Lean-burn credits are subject to the same phase-out rule as hybrid credits. So they will be reduced and eventually disallowed after a manufacturer has sold 60,000 qualifying vehicles. At this point, however, the phase-out rule is no cause for concern.

Here's the current list of IRS-approved lean-burn diesels along with applicable credit amounts.

Mercedes-Benz Diesels
2009 R 320 BlueTEC (crossover) -- $1,550
2009 GL 320 BlueTEC (large SUV) -- $1,800
2009 ML 320 BlueTEC (mid-size SUV) -- $900

Volkswagen Diesels
2009 Jetta 2.0L TDI Sedan -- $1,300
2009 Sportwagen 2.0L TDI -- $1,300

The maximum tax credit for qualified alternative fuel vehicles is $4,000. These machines run on compressed or liquified natural gas, liquified petroleum gas, hydrogen, or methanol. So far, the IRS has only certified one 2008 model as eligible for the alternative fuel credit.

2008 Honda Civic GX (runs on compressed natural gas) -- $4,000

If you buy a vehicle that qualifies for a tax credit this year, be sure to attach Form 8910 (Alternative Motor Vehicle Credit) to your 2008 Form 1040 when you file next year. Meanwhile, enjoy that new ride!

A little-known fact is that you will be stiffed out of all or part of your rightful vehicle tax credit if you get hooked by the dreaded alternative minimum tax (AMT). Why? Because none of the credits explained in this article can be used to reduce an individual taxpayer's federal income tax bill below his or her AMT liability amount (reduced by certain other credits).

If this ticks you off (and it should), write your Congressperson to demand the repeal of the super-unfair AMT. Nobody likes it, but our beloved politicians often need a great big nudge to do what's right. With the November election rapidly approaching, now is a really good time to nudge.