Sep 18 - McClatchy-Tribune Business News Formerly Knight Ridder/Tribune Business News - Cara Baruzzi New Haven Register, Conn.

In addition to helping the environment by reducing emissions, hybrid vehicles also can save owners money thanks to a new income tax credit of up to $3,400.

Many people are unaware of the new federal tax credit that began earlier this year, according to the Connecticut Society of Certified Public Accountants.

"A lot of people do not realize it," said Bill Saas, a CPA and partner at Saas Kirwan Associates of Wallingford. "It's a relatively new phenomenon in the law."

Certain qualified hybrids -- cars and sport utility vehicles that combine an electric motor with a gasoline-powered engine, thereby producing fewer emissions -- are now eligible for an income tax credit of up to $3,400. The exact amount depends on the hybrid's make and model, as well as the number of vehicles manufactured.

The formula used to compute the tax credit takes the hybrid's fuel economy and total expected lifetime fuel savings into account. The better a vehicle fares in these two aspects, the larger the credit. The new tax credit, created in the Energy Policy Act of 2005, is better than the $2,000 tax deduction that was previously offered on certain hybrids, Saas said.

"A credit is a lot more powerful than a deduction," he said. A tax credit, according to the CPA society, directly cuts a taxpayer's tax bill, reducing the tax owed, whereas a tax deduction just reduces the taxpayer's taxable income.

The new credit is nonrefundable, meaning that while it can reduce regular income tax liability to zero, it will not produce a tax refund. If an individual buys a hybrid that comes with a $2,200 tax credit and his or her tax bill is $2,000, he or she will lose $200 of the credit's tax value. Excess credit cannot be carried over to another year. When taxpayers are eligible for multiple tax credits, there are special ordering rules that determine which credit is taken first, with the hybrid tax credit taken last after all other credits. In addition, the hybrid tax credit does not reduce a taxpayer's alternative minimum tax. To qualify for the tax credit, hybrids do not have to be used solely for business purposes but they do have to be new; used vehicles are ineligible. The credit is denied if the buyer intends to purchase a hybrid only to resell it, according it to the CPA society.

The credit is available for up to 60,000 vehicles from each automaker, meaning interested buyers should act fast to take advantage, Saas said. The 60,000-vehicle limitation applies to the total number of all qualified hybrid models sold by the manufacturer, not to each qualified hybrid model. Therefore, buyers should ask auto dealers how many hybrids the manufacturer has already sold in order to ensure that theirs will qualify to receive the credit, Saas said.

When shopping, he said, buyers should be skeptical of hybrids' sticker prices, as some auto dealers may attempt to build the amount of the tax credit into the sales price.

Also, buyers should know that the amount of the tax credit decreases over time. On, the full amount of the allowable credit became available through the quarter that the automaker sells 60,000 hybrids. During the two subsequent quarters, taxpayers may claim 50 percent of the credit, and then may claim only 25 percent after that. The credits end completely in 2010. A list of vehicles eligible for the credit is on the Internal Revenue Service's Web site, www.irs.gov.