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Alternative Fuel Incentives and Tax Credits


Everyone likes to save money, right? And wouldn’t it be great if you could combine saving with living lighter on the earth? Read on.

Varieties of federal incentives are available in the United States that will ease your transition to alternative fuels. Most of these incentives are tax credits, meaning they will reduce the amount of net tax you owe—that’s different than just another deduction—which could mean bigger savings for you. Of course, always check with your tax professional for current, accurate advice on any tax credits or deductions.

Depending upon the vehicle and fuel you choose, check out the credits available:

Alternative Motor Vehicle Credit

Did you buy a new alternative fuel vehicle and place it in service after January 1, 2006? You may be eligible for this credit. This legislation provides a tax credit equal to 50 percent of the incremental cost of the vehicle, plus an additional 30 percent of the incremental cost for vehicles with near-zero emissions.

Exactly how much of a credit are we talking about?

The figures are based on vehicle weight as follows:

  • $5,000: 8,500 GVWR or lighter
  • $10,000: 8,501 to 14,000 GVWR
  • $25,000: 14,001 to 26,000 GVWR
  • $40,000: 26,001 GVWR and heavier

As the buyer of the vehicle, you’ll need to download IRS Form 8910 to claim the credit. This legislation replaces the Clean Fuel Vehicle Property Tax Deduction from earlier years. Download IRS Notice 2006-54, which establishes the credit rules for vehicle conversions.

Clean Diesel Tax Credit

This tax credit is similar to the Hybrid Motor Vehicle Credit (see below), in that it offers an income tax credit to folks who purchase models that qualify for the Advanced Lean Burn Technology Motor vehicle category. Check which vehicles qualify for the clean diesel tax credit.

Hybrid Motor Vehicle Credit

This tax credit is for light-duty hybrid vehicles (less than 8,501 GVWR) based upon their improved fuel economy and lifetime fuel savings potential. The credit has two parts: the fuel economy portion, which ranges from $400 to $2,400, and the conservation credit, which ranges from $250 to $1,000. Learn more about the hybrid tax credit.

The IRS certifies vehicles for the credit in addition to publishing qualifying credit amounts. See Notice 2006-9. This tax credit expires December 31, 2010. Learn which hybrid vehicles qualify for current hybrid tax credits.

Fuel Cell Motor Vehicle Credit

For the purchaser of a light-duty fuel cell vehicle, this is a base tax credit of $8,000, and is valid until December 31, 2009, after which it decreases to $4,000. Qualifying vehicles must meet Bin 5 Tier II emission levels.

Additional base tax credits are available for medium- and heavy-duty fuel cell vehicles; amounts are determined by the IRS and based on a sliding scale by vehicle weight. This credit is available until December 31, 2014.

Electric Vehicle Tax Credit

This credit is due to expire in 2007 and was reduced by 75 percent in 2006, so it would be wise to check with your tax professional to clarify the portion that could apply to your situation. Overall, the credit equals 10 percent of the cost of the vehicle up to $4,000, and the vehicle must be powered primarily by an electric motor drawing current from batteries or other portable sources of electricity. Business or personal vehicles qualify.

Additionally, for qualified electric vehicle recharging used in a trade or business, a tax deduction of up to $100,000 per location is available. More information is available here.

Alternative Fuel Infrastructure Tax Credit

This is a credit of up to $30,000 (equal to 30 percent of the cost of the alternative refueling property), normally reserved for businesses but it also applies to buyers of residential refueling equipment—they can receive a tax credit of $1,000. The credit is effective on equipment put into service after December 31, 2005 and expires December 31, 2009 (the hydrogen credit portion is good until 2014).

You’ll need to use the Internal Revenue Service (IRS) Form 8911, published in May 2006, to claim the credit. Download Form 8911 here for qualified property and the credit value.

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