Tax Tips

Tax Breaks for Going Green

Certain hybrid cars and home improvements qualify for a tax credit.

By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance

February 20, 2009

If you bought a fuel efficient car or made energy-efficient improvements to your home last year, you not only reduced your carbon footprint, you might also shrink your tax bill.

Depending on the model hybrid car you bought, you may be eligible for a tax credit on your 2008 return. (A tax credit is more valuable than a tax deduction because it reduces your tax bill dollar for dollar. A deduction merely reduces the amount of income that is taxed.)

However, the tax credit is no longer available for some of the most popular hybrid vehicles, such as the Toyota Prius because it is phases out once a manufacturer sells 60,000 hybrid vehicles. So if you bought a Lexus or Toyota hybrid in 2008, you’re out of luck.

Honda Civic CVT hybrids purchased between January 1 and June 30, 2008, qualify for a $1,050 tax credit. Those purchased between July 1 and December 31, 2008, qualify for only a tax credit of just $525. Tax credits available for other 2008/2009 hybrids purchased during 2008 range from a high of $3,000 for the Ford Escape, Mazda Tribute and Mercury Mariner hybrids to a low of $1,300 for Chevrolet Malibu and Saturn Aura hybrids. You can find the exact amount of credit available for various hybrids at www.irs.gov. (Search for hybrid vehicle credit.)

If you may energy-efficient improvements to your home during 2008, you could be entitled to a tax credit. You can claim a credit for 30% of the cost of installing a solar water heater, solar electric heater or geothermal heat pump up to a maximum credit of $2,000. You can also claim a credit for 30% of the cost of a fuel cell up to $1,000 of kilowatt capacity or small wind energy generators for a credit of 30% of the cost up to $1,000 per kilowatt of capacity (not to exceed $4,000.)

You can claim the credits if you installed these energy-saving devices in your principal residence or vacation home (except for the fuel cell which qualifies for a tax credit only if you install it in your principal residence.) None of the credits can be claimed for equipment used to heat a swimming pool or hot tub.

Claim the credits on Form 5696 (Residential Energy Efficient Property Credit) and attach it to your tax return. You can use the credits to offset both regular tax and alternative minimum tax. Although the energy tax credits are not refundable—meaning they cannot reduce your tax liability below zero—you can carry the excess credit over to your 2009 taxes.

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