In an effort to conserve fossil fuels and improve America’s infamous reputation as a major polluter, the United States government has been offering a tax credit for purchasing a new, more environmentally-friendly vehicle. These credits were first offered in 2005 and have been extended through the end of 2010. A tax credit is actually better to take advantage of than a deduction. A tax credit reduces your tax dollar-for-dollar while a tax deduction simply removes a percentage of the amount of tax owed. Therefore, it’s important to get out before December 31, 2010, if you want to take advantage of this credit. It doesn’t appear that the government will be renewing it again. The credit ranges anywhere from $575 for some diesel models, all the way up to $7,500 for a couple of the full-electric cars.

Vehicles which qualify for the tax credit are what the government has labeled “energy-efficient” vehicles. Basically that’s any car weighing under 8,500 lbs. in gross vehicle weight, and not running on standard gasoline. Cars operating by way of alternative fuels such as diesel fuel, compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, or any fluid that is at least 85% methanol, qualify as energy efficient. Of course, that also includes hybrids, plug-in hybrids, and full-electric cars as well. A full list of the vehicles eligible for the tax credit can be found here: http://www.edmunds.com/fueleconomy/car-tax-credit.html. Credits do begin to phase out for certain manufacturers’ vehicles once they hit a pre-determined number of vehicles sold, so you’ll definitely want to check that list before you make your way to the dealership with your checkbook in hand.

If you’re planning on leasing a vehicle, there is one thing to watch for. Remember that these credits apply only to the original owner of the vehicle. In the case of leasing, the dealership retains ownership of the vehicle. Therefore, it will claim the credit. Most dealers are kind enough to pass that credit on to the consumer (especially if they really want to keep selling cars), but you should always ask and make sure that’s the case before signing anything.

Remember as well that the tax credits listed are federal tax credits. There are state tax credits available as well, but they will vary by state. In states where there is no sales tax on vehicles, most will allow for other types of tax credits on the purchase. Make sure you research your state government’s website or check with your local commerce department to find out what is available in your state of residence.

What’s the downside to all this free money? Well, the fact that it’s going to be running out soon is obviously a big downside. As of this writing, there is less than a month left. The other bad side is that vehicle manufacturers know this as well. Some of them may take advantage of the added savings being passed on to consumers by raising prices slightly to try and get their own little slice of the pie. As such, you may see some price drops on the models eligible for the tax credit after the first of the year. Will that price difference offset the tax savings? Probably not, but it’s still one of those unavoidable negatives.

There are pros and cons to nearly every decision and this one is no different. Many believe the tax credit is going to do more damage than good. Others feel it is a step in the right direction towards becoming more environmentally friendly and boosting a slumping U.S. auto market. Either way, if you’re considering buying an alternative-fuel vehicle, why wait? Might as well put a little extra coin in your pocket, whatever the case may be.

Make sure to also check out the list of year-end new car deals, new car lease deals, and certified used car deals being offered by the car makers.  Given the year-end and car manufacturers’ desire to sell more cars, there’s great deals to be had if you do your homework and are aware of all the incentives, discounts, rebates you can qualify for.  Here’s some tips on year-end car buying strategy.

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