LAST MONDAY, PRESIDENT BUSH

signed the Energy Tax Incentives Act of 2005. While the law was described by some in the media as a giveaway to huge energy companies, it also contains some generous new tax incentives for consumers.

The best part: They all come in the form of tax credits, the very best kind of tax break. A credit lowers your federal income tax bill dollar for dollar. In contrast, a deduction lowers only the amount on which you're taxed, so your bill is reduced only by a percentage of the write-off.

Here's what the 2005 Energy Act has in store for you.

Four New Tax Credits for Energy-Efficient Vehicles
For this year, you can claim a deduction for purchasing (not leasing) a qualifying new (not used) clean-fuel vehicle, including a hybrid gas-electric vehicle like the Toyota Prius or Ford Escape. Both of these cars (and several other 2005 model-year vehicles) will entitle you to a $2,000 write-off on this year's Form 1040.

The 2005 Energy Act repeals the deduction effective after this year. Actually that's a good thing for many folks, because the new law replaces that deduction with four new tax credits that could save you substantially more at return-filing time. So you might be better off waiting until 2006 to get yourself a new energy-efficient ride. The credits kick in for new vehicles put to use on or after Jan. 1.

Credit No. 1 for Hybrid Vehicles: Qualified hybrid vehicles combine an internal combustion engine with another propulsion system that relies on an onboard rechargeable energy source like electric batteries.

The credit for hybrid cars and trucks with gross vehicle weight ratings of 8,500 pounds or less (in other words, your garden-variety autos and light trucks) has two parts. The first part is a so-called fuel economy credit. It can range between $400 and $2,400, based on fuel-efficiency improvements compared with 2002 model-year vehicles. The second part is a so-called "conservation credit." It can range between $250 and $1,000, based on expected fuel consumption reductions over the life of the vehicle. The minimum combined credit for a hybrid vehicle that's eligible for both the fuel economy part of the credit and the conservation part will be $650. The maximum combined credit will be a whopping $3,400.

To give you an idea of how much these credits might be worth, the current version of the Toyota Prius would apparently qualify for a combined credit of about $2,750. As you can see, that's far better than the $2,000 deduction available for this year. Informed speculation says the Honda Insight hybrid would qualify for a combined credit of $1,450, while the Honda Civic hybrid would bag a $2,350 credit. Of course, we don't yet know the credit amounts for 2006 models, but the numbers cited here will probably be in the ballpark.

Credit No. 2 for Lean-Burn Technology Vehicles: Qualified "lean burn" vehicles are passenger cars and trucks with internal combustion engines that use a direct injection of a fuel mix with a higher-than-normal percentage of air. Some new diesel cars that will soon be introduced in the U.S. will qualify. Many car enthusiasts (including me) are anxiously awaiting the new crop of diesels, which are already well-accepted in Europe. They will achieve far better fuel economy without sacrificing much performance (unlike some hybrids, which, on steep hills, are often passed by oxcarts).

The lean-burn tax credit amounts are the same as those for hybrid vehicles. So the minimum combined credit amount for a lean burn vehicle that qualifies for both the fuel economy and conservation credits will be $650, while the maximum combined credit will be $3,400. Which vehicles will qualify and how much the credits will be for them remains to be seen. Stay tuned.

Credit No. 3 for Fuel-Cell Vehicles: Qualified fuel-cell vehicles include, for example, cars that run on hydrogen cells. The fuel-cell credit is also made up of two parts. The first part is a flat amount based on the vehicle's weight. The second part is a sliding scale figure based on fuel-efficiency improvements compared with 2002 model-year vehicles. The maximum combined credit amount can be as high as $12,000 ($8,000 flat amount plus $4,000 for fuel efficiency). This sounds really great, but fuel-cell vehicles are a rarity. It will be interesting to see if the new tax credit changes the status quo.

Credit No. 4 for Alternative-Fuel Vehicles: Qualified alternative-fuel vehicles include cars and trucks that run solely on compressed or liquefied natural gas, liquefied petroleum gas, hydrogen, or any liquid that is at least 85% methanol. Reduced credits are allowed for mixed-fuel vehicles that run on a mixture of an alternative fuel and a petroleum-based fuel. The maximum credit for garden-variety autos and light trucks is $4,000. Once again, you will not find very many qualifying vehicles running around right now. We shall see if the new tax credit makes a significant difference.

New Tax Credit for Residential Energy Improvements
This personal tax credit has a $500 lifetime limit, but it's broad enough that many folks will benefit even though the numbers won't be very big. The credit applies only to energy-saving items you put to use in your main residence after 2005 and before 2008 (vacation homes don't count). The credit amount equals the sum of 10% of your expenditures for a qualified energy efficiency improvements to an existing home plus 100% of your expenditures for qualified residential energy property.

The 10% part of the credit for qualified energy efficiency improvements covers outlays for the following items:

• Metal roofs coated with heat-reduction pigments.
• Exterior doors.
• Exterior windows including skylights (the lifetime credit for windows is limited to $200).
• Insulation materials designed to reduce heat loss or gain.

The 100% part of the credit for qualified residential energy property covers money spent on these things:

• Qualified electric heat pumps, electric heat pump water heaters, geothermal heat pumps, and central air conditioners. The credit for these can't exceed $300.
• Qualified natural gas, propane and oil furnaces, and qualified hot-water boilers. The credit for these can't exceed $150.
• Advanced main air circulating fans. The credit for these can't exceed $50.

New Tax Credit for Other Residential Energy Equipment

You can also collect a completely separate personal tax credit equal to 30% of the cost of:

• Qualified solar water-heating equipment (maximum credit of $2,000).
• Qualified electricity generating solar photo-voltaic property (maximum credit of $2,000).
• Qualified fuel-cell property (maximum credit of $500 for each 0.5 kilowatt of capacity).

This credit applies only to equipment put to use in your personal U.S. residence after Dec. 31, 2005, and before 2008. However, you can't claim the credit for equipment used to heat a swimming pool or hot tub. Finally, the credit for fuel-cell property is available only for your principal residence.