Do you know that if you purchase a hybrid car that you might get a tax credit on your federal tax return? And depending on which hybrid car you buy, the credit could be over $3,000! (A tax credit is a subtraction dollar-for-dollar off your bottom line taxes.)

My friend recently bought a Toyota Prius and her taxes for 2006 will be reduced by $3,150.  So how do you do it?

First, go to the IRS website, Hybrid Cars and see which vehicles are eligible for the credit. You will notice that different car and trucks have different credits.  The amount of the credit depends on the fuel efficiency of the vehicle. The more gas it saves, the higher the credit.

You must purchase the vehicle after 12/31/2005 and be the original owner. This credit is set to expire in 2010 but don’t wait too long. The law limits the full credit to the first 60,000 vehicles sold by each automaker. Then the credit is slowly reduced down to zero.  The IRS reports that Toyota has already reached the 60,000 vehicle limit; effective October 1st, 2006, the tax credit will be reduced.  (If you purchased a hybrid car in 2005, you would be eligible for a deduction, not a credit, on your 2005 tax return.)

If you decide to purchase a “gas-saving” car, be sure to check with your auto dealer to see how much of the credit will be available to you.

For IRS news releases and fact sheets on hybrid vehicles, see IRS News Hybrid Vehicles.

For more information on tax credits, read How Deductions and Credits Affect Your Tax Return.