Hybrid vehicles are good for environment and your wallet

Sandra Block USA TODAY

Cameron Diaz has one. So does Donny Osmond. Leonardo DiCaprio has two.

No, we're not talking about People's Choice awards. We're talking
about hybrid cars, which combine an electric motor with a gasoline
engine to produce above-average gas mileage.

Unlike earlier versions, the new hybrids don't have to be plugged in,
nor do they look like they came from Toys R Us. And priced at about
$20,000, they're gaining popularity among non-celebrities, too.

Most hybrid-car owners buy the cars because they want to save on gas
and protect the environment. But now, there's another benefit.
Starting this year, hybrid-car owners may qualify for a federal tax
deduction of up to $2,000.

Owners of all-electric cars have been able to take a $4,000 tax
deduction for several years. But the 1992 energy law creating that tax
deduction didn't specifically address hybrids. In May, the Internal
Revenue Service ( news - web sites) said owners of hybrids could take
a $2,000 deduction, as long as the vehicle's manufacturer could prove
the hybrid system added at least that much to the cost of the car.

Officials with Honda and Toyota, which sell the three hybrid models
now on the market, say they're confident their cars will qualify for
the full deduction. They expect to receive certification from the IRS
within the next few weeks.

What it's worth

The value of the deduction will vary, depending on your tax bracket.
If you're in the 30% bracket, you'll save $600 on 2002 taxes. ''It's a
good deal for the consumer,'' says Bob Trinz, editor of RIA's Federal
Taxes Weekly Alert. ''Uncle Sam is giving you back $600 of the cost of
the car.''

If you own a hybrid, or are considering buying one, here's what you
need to know about the tax break:

* You don't have to itemize to qualify.

The deduction is ''above the line,'' which means you can take it even
if you take the standard deduction, Trinz says. On your tax returns,
record it as an adjustment to income. You probably won't need to
include a copy of the sales receipt, but keep one for your records,
Trinz says.

* It is limited to new cars.

If you buy a used hybrid, you can't take the deduction. In addition,
the deduction is a one-time deal: You can only take it for the first
year you use the car.

* The deduction is retroactive.

If you bought a hybrid car in 2001 or 2000, you may still qualify for
a tax break. Once your car has received the necessary certification,
you can file an amended tax return claiming the deduction.

* The deduction is scheduled to phase out by 2007.

You can take the full $2,000 deduction on any hybrid purchased between
now and 2003. After that, the deduction will be reduced by 25% a year,
with no deduction after 2006.

That means hybrids scheduled for release after 2003, such as Ford's
Escape sport-utility vehicle and General Motors' V-8 pickups, may not
qualify for the full deduction. But an energy bill pending in Congress
would provide new deductions and credits for energy-efficient
vehicles.

Hybrid sales still account for a tiny slice of the U.S. car market,
with fewer than 29,000 hybrids sold in the past two years, according
to the Electric Vehicle Association. But J.D. Power and Associates, a
market research firm, estimates hybrid sales will hit 500,000 a year
by 2006. J.D. Power also expects carmakers to introduce up to 20
hybrid models, including cars, trucks and SUVs, in the next four or
five years.

State tax benefits

If you own a hybrid, or are thinking of buying one, check with your
state tax agency to see if you qualify for state tax relief. Several
states have enacted tax breaks for hybrid drivers, and others are
considering them.

In Maryland, for example, buyers of hybrid cars may qualify for a tax
credit of up to $1,500. And last week, New York Gov. George Pataki
introduced legislation that would provide a $2,000 state tax credit
for buyers of hybrid cars. Pataki's proposal would also exempt $3,000
of the price from state and local sales tax.

Several states also permit solo drivers of hybrid cars to use
high-occupancy vehicle lanes during rush hour. So even if your new
Toyota Prius lacks the horsepower of your boss' BMW, you may still be
able to pass her on the expressway. Hard to place a value on that.