Want a cut of the $14 billion in energy law?

Miguel Llanos Reporter • Profile • E-mail

You, too, can get some of the $14 billion in tax breaks in the energy bill that President Bush signed into law in August. No, you won't qualify for billions or even millions — that’s for the energy industry. But consumers concerned about energy costs and striving for efficiency could write several thousand dollars off their federal income tax.

Here's how the credits work: Buy or lease a hybrid gas-electric vehicle and qualify for a tax credit of up to $3,400. Install solar power in your home and get up to a $4,000 tax credit. Make your home more energy efficient and get credits ranging from $50 to $500.

Don't go shopping yet — purchases and home improvements don't qualify until 2006.

The consumer tax credits are unprecedented, and with oil prices setting record after record over the summer, they couldn't have come at a better time. “This is the biggest package for consumers in terms of annual incentives,” says Steve Nadel, executive director of the American Council for an Energy-Efficient Economy, a nonprofit group in Washington, D.C.

But whether the credits make sense will vary for each consumer. The vehicle credit significantly narrows, but doesn't eliminate, the price gap between hybrid and gas-only vehicles, and solar systems can cost $25,000, which means a return on investment could take years.

“Ideal candidates would be those who can afford to pay a little more now with the hope of long-term savings down the road, helped out a little by the tax savings on the initial investment,” says Mark Luscombe, a chief analyst at CCH Inc., a tax publication, software and services firm.

The credits run through 2010 for hybrid cars and SUVs, and through 2009 for medium-sized and heavy-duty hybrid trucks.

But there's a big caveat here. Since the credits are capped at 60,000 vehicles per carmaker, they could phase out fairly quickly for companies with the best-selling hybrids.

Toyota could reach the cap by the first half of 2006 given that sales of its Prius, the top hybrid in the U.S. market, have been around 10,000 a month recently. The company also sells a hybrid Highlander and a hybrid Lexus 400h SUV.

Six months after a carmaker reaches its cap, the credit is halved for that company’s vehicles, and then halved again during the following six months before ending completely.

And a second caveat: Consumers shouldn't expect freebies from the credits. The credits are meant to bring down the initial cost of a new technology, not cover it entirely, says Lowell Ungar, an analyst with the Alliance to Save Energy, a nonprofit group in Washington, D.C. "The energy savings should more than cover the rest of the cost," he adds.

With those warnings, here are some specifics on the the various credits.

Cashing in on cars
Hybrids bought in 2005 now qualify for a $2,000 federal income tax deduction, which merely reduces one's gross income. Under the new law, hybrids bought in 2006 may qualify for a tax credit, which is subtracted directly from what one owes in taxes.

That credit is the biggest consumer incentive in the law, but it’s also the most complicated because the amounts will depend on vehicle weight, fuel economy and emissions.

For example, a hybrid SUV weighing under 8,500 pounds that is 200 percent as fuel-efficient as a similar 2002 gas-only SUV would qualify for a $1,600 credit, according to CCH. It could also qualify for a “conservation credit” based on projected lifetime fuel savings — up to $1,000 for a lifetime savings of 3,000 gallons or more.

Luscombe advises shoppers not to worry about the math. “Manufacturers will most likely be happy to do the calculations for them” once 2006 comes around, he says.

If you can't wait, the American Council for an Energy-Efficient Economy has issued its credit estimates, concluding that the Toyota Prius would get the biggest credit, $3,150.

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