The IRS allows some income tax benefits for buying a hybrid passenger automobile (a passenger automobile that is propelled by both a gasoline engine and an electric motor that is recharged as the motor vehicle operates).

A purchaser of a hybrid passenger automobile (referred to below as a “hybrid”) is allowed a tax credit of from $400 to $3,400 depending on the model. A credit usually is more advantageous than a deduction because a tax credit is subtracted dollar-for-dollar off the bottom line of your federal tax bill, while a deduction simply reduces taxable income.

The amount of the hybrid credit depends on the fuel efficiency of the vehicle. The more gas it saves, the higher the credit. However, calculating the credit is a bit complicated, with the exact amount of your credit depending on three separate factors:

the weight of the vehicle,

its fuel economy, and

its lifetime fuel savings.

IRS has certified various hybrid models made by Ford, General Motors, Toyota, Honda, Nissan, and Mazda as qualifying for the credit. In each case, the certification specifies the amount of the credit for the particular model.

However, the law limits the credits to 60,000 hybrid vehicles from each automaker. This total includes all brands sold by the particular automaker. Thus, for example, the Ford total includes Ford and Mercury hybrids.

Once a manufacturer has sold 60,000 hybrid vehicles, the tax credit for that manufacturer's hybrids is slowly reduced over the next five consecutive quarters, eventually dropping to zero.

Honda hybrid sales reached the 60,000-vehicle limit during the calendar quarter ended Sept. 30, 2007. As a result, the credit for Honda hybrid vehicles is being phased out. For Honda hybrid vehicles purchased after Dec. 31, 2007 and before July 1, 2008, the credit is 50% of the otherwise allowable credit amount. Honda hybrids purchased after June 30, 2008 and before Jan. 1, 2009 qualify for 25% of the otherwise allowable credit.

Toyota hybrid sales reached the 60,000-vehicle limit during the calendar quarter ended June 30, 2006. Accordingly, the credit for Toyota hybrids has completely phased-out. After September 30, 2007, purchasers of Toyota (including Lexus) hybrid vehicles cannot claim the related tax credit.

Ford hybrid sales reached the 60,000-vehicle limit during the calendar quarter ended December 31, 2008. As a result, the credit for Ford hybrid vehicles is being phased out. For Ford hybrid vehicles purchased after March 31, 2009 and before October 1, 2009, the credit is 50% of the otherwise allowable credit amount. Ford hybrids purchased after September 30, 2009 and before April 1, 2010 qualify for 25% of the otherwise allowable credit. Taxpayers who purchased Ford hybrids after March 31, 2010 cannot take the related tax credit.

Hybrid vehicles built by the other hybrid manufacturers haven’t yet reached the 60,000-vehicle limit, and thus continue to qualify for the maximum credit allowable.

Here are some additional points about the credit:

In general, the credit is allowed to the vehicle owner. Thus, if you lease a hybrid (rather than purchase it), you won't qualify for the credit.

The credit is allowed in the year the vehicle is placed in service.

The vehicle must be used predominantly in the U.S. to qualify for the credit.

The original use of the hybrid auto must begin with you (i.e., the vehicle must be new).

The credit isn't allowed if you buy the hybrid auto for resale.

No credit is allowed for the portion of the cost of any property taken into account under Code Section 179 , the expensing election provision.

The portion of the credit attributable to vehicles of a character subject to an allowance for depreciation is treated as a portion of the general business credit. For tax years beginning after 2008, the remainder of the credit is treated as a personal credit that can offset the alternative minimum tax (AMT).