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Tax credit worth up to $3,400 adds incentive to buying hybrid

WASHINGTON—Drivers who are seeking to beat rising gas prices by buying hybrid vehicles could save more money if they're patient.

Starting in 2006, people who buy or lease hybrid vehicles—cars or sport utility vehicles powered by both gasoline and electric engines—can get tax credits of up to $3,400. The credit is a dollar-for-dollar reduction in what you owe in income taxes. It's included in the energy bill that President Bush signed into law Aug. 8.

Not all hybrids have been approved for the credit, and how much you'll get back depends on the efficiency of the car and when you buy it. In addition, a cap on how many hybrid purchases qualify and waiting lists for some hybrids mean you'll have to act fast.

Here's how it works. The Internal Revenue Service has approved seven hybrid vehicles for the tax credit: the Ford Escape, Toyota Highlander, Honda Accord, Honda Civic, Honda Insight, Lexus RX400h and Toyota Prius.

More may qualify as the IRS reviews new hybrids. Chevrolet, Nissan, Dodge and Saturn plan to release hybrids starting in 2007, according to Brad Berman, who runs a Web site with news about hybrid vehicles with the help of the University of Michigan (www.hybridcars.com).

"Generally assume that the vehicles that achieve better gains in fuel efficiency are the ones that are going to be more handsomely benefited by the tax incentives," Berman said.

To get the tax credit you'll have to wait to buy the vehicle until after Jan. 1. If you buy one of the first 60,000 qualifying vehicles that your automaker sells, or buy one in the first three months after the quarter in which that sales total is reached, you'll get the maximum rebate. After that, the tax credit starts to phase out. You can get in line now but you can't take delivery of the car before Jan. 1.

The IRS will determine later this year exactly how much of a tax credit you can claim for each hybrid model. The amount will be based on how much more fuel efficient the car is than a 2002 nonhybid in the same weight class. Efficiency will be based on the Environmental Protection Agency's estimate of savings over 120,000 miles.

The Toyota Prius—which the EPA rates the most fuel-efficient car on the market at 61 miles per gallon—will get you the biggest tax credit, $3,100, says the American Council for an Energy Efficient Economy, a Washington-based nonprofit group that advocates energy conservation. Therese Langer, the group's transportation program manager, said it was possible that a new hybrid or improvements in current ones could qualify for the full $3,400 rebate.

Jon Linkov, the auto editor for the consumer advocacy group Consumer Reports, notes that only some hybrids are designed to save gas. You'll recoup costs more quickly, he said, with the Prius, Honda Civic and Insight, and Ford Escape. Other cars, including hybrid models of the Honda Accord, Toyota Highlander and Lexus RX400h, are aimed at drivers who want performance more than fuel efficiency.

Here's how the difference works out: Ford's suggested retail price for the 2005 V6 Escape hybrid is $28,525, $2,980 more than the gasoline-powered V6 Escape. Linkov estimates, based on tests he performed and an assumed $3.00-per-gallon cost for gasoline, that you'd save $769 in fuel costs annually driving 15,000 miles per year. The estimated tax credit for the V6 Escape is $1,950. Using these figures, it would take about 16 months to recoup the hybrid's higher price.

Then there's the 2005 V6 Honda Accord hybrid, one of the performance-enhancing hybrids. It costs $30,140, compared with $26,850 for the Accord V6 gasoline engine. Using Linkov's formula, the savings aren't much. The fuel cost for the hybrid is only $156 less and the estimated tax credit just $650. So it would take more than 16 years to recoup this hybrid's higher price.

"Not every customer wants just fuel economy," responded Andy Boyd, a Honda spokesman.

Berman said fears over having to replace a hybrid's battery—offsetting the value of the tax credit—were "logical but unfounded." Automakers claim that hybrid batteries can last 150,000 to 200,000 miles. A replacement can cost as much as $4,000, but most automakers back their batteries for at least eight years or 80,000 miles, whichever comes first.

If you can't wait until next year to buy a hybrid, there's a $2,000 onetime tax deduction you can take now on your purchase. That runs out Dec. 31 and can be claimed on your 2005 tax return.

The tax credit will save you more, however: The tax deduction merely reduces your gross income while the tax credit is subtracted from what you owe in taxes.

For an estimate on the tax credit you can get, check www.aceee.org/transportation/hybtaxcred.htm#table

For more information on hybrids and fuel economy, go to the Department of Energy site: www.fueleconomy.gov/feg/tax(underscore)hybrid.shtml. They'll update the site later this year with more details on the hybrid tax credit.

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Looking to go green on the highway? Here's what you need to know before you start your search for a hybrid vehicle:

_All hybrids aren't alike. A "pure" hybrid, such as the Toyota Prius or Ford Escape, works better for a city driver, said Brad Berman, who runs a Web site with news about hybrids (www.hybridcars.com). A pure hybrid is capable of running solely on its less powerful electric engine for an extended period, ideal for less demanding stop-and-go traffic. A mixed or soft hybrid, such as the Honda Civic, needs a combination of its electric and more powerful internal-combustion engine to move.

_Hybrids may not work for you if you need a powerful engine for mountain roads or rugged terrain, said Therese Langer of the American Council for an Energy Efficient Economy, a nonprofit energy-conservation advocacy group in Washington.

_The Environmental Protection Agency fuel-economy ratings don't reflect real-world driving conditions, so no hybrid will yield as many miles of savings as listed. Still, the agency's ratings remain the best way to compare energy efficiency. You can compare cars at www.epa.gov/greenvehicles/all-rank-05.htm.

_To save money, you'll want your hybrid to be at least 25 percent more efficient than its gasoline-engine counterpart, according to Langer. "That would be the rough cut between something that gives me good fuel improvement and something that doesn't."

_Take a hybrid for a test drive. There aren't many styles available and you'll want to make sure it fits your needs. You may be able to find a gasoline-engine vehicle that's almost as efficient as a hybrid.

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(c) 2005, Knight Ridder/Tribune Information Services.

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