Tax Credits and Cars

A number of cars are eligible for a credit on 2010 tax returns.

Hybrid and alternative-fuel vehicles are well-known for their green credentials, but they can also save you money on your taxes. Thanks to the Energy Policy Act of 2005, certain cars purchased beginning in 2006 can earn credits of up to $4,000 — a handsome discount when factored into the price of a car.

To be eligible for the credits, vehicles have to fall into one of five categories: fuel cell, advance lean-burn technology, hybrid, electric or alternative fuel, according to the Internal Revenue Service.  These credits expired at the end of last year, so your 2010 tax return is the last opportunity to claim one. (Plug-in electric cars are eligible for a tax credit — which hasn't expired — of up to $7,500 under a separate section of IRS code.)

Thanks to help from IRS spokesman Eric Smith and Lindsey Buchholz, senior tax research analyst for the Tax Institute at H&R Block, here are the answers to some frequently asked questions regarding tax credits on green cars.