02:43 PM EDT on Tuesday, August 2, 2005

By Neil Downing / The Providence Journal

Get ready to sort through a basket of federal income tax breaks that are intended to encourage you to save energy.

That big piece of energy legislation you've probably heard about, the one that Congress approved last week and President Bush is scheduled to sign soon, is mainly geared toward industry.

But it also contains some tax breaks that are geared toward consumers — including new tax benefits for buying hybrid vehicles, and making home improvements to boost your home's energy efficiency, said Mark A. Luscombe, a lawyer, accountant and principal analyst for CCH of Riverwoods, Ill., a national publisher of tax information for accountants and other tax professionals.

Most of the breaks are scheduled to take effect about five months from now. As a result, some consumers who take advantage of the provisions will see a tax benefit early next year, when they start to make their periodic estimated tax payments.

Other consumers — those whose main source of income is wages from a job, for example — will have to wait until early 2007, when they do their federal returns for the 2006 tax year. But they could get the benefit in advance, by adjusting their withholding at work, said Patricia A. Thompson, head of the Rhode Island Society of Certified Public Accountants' federal and state tax committee.

Following is a brief rundown on some of the key provisions for consumers:

Hybrid vehicles: If you buy a hybrid vehicle now, you're generally entitled to a federal income-tax deduction of up to $2,000, said Thompson, who is also tax partner with Piccerelli Gilstein & Co. LLP, a CPA firm in Providence.

You use it to reduce the amount of your adjusted gross income. As a result, the deduction helps lower the amount of your income that will be subject to tax. So if you're in the 15 percent federal income tax bracket, for example, you could save up to $300; if you're in the 25 percent bracket, you could save up to $500.

The new legislation eliminates the deduction and replaces it with a credit, so it's potentially more valuable. That's because a deduction only reduces the amount of your income that's subject to tax; a credit reduces your actual tax, dollar for dollar, Thompson said. For example, the maximum credit on a small hybrid passenger vehicle will be $3,400, Luscombe said.

The bad news is that the credit is extraordinarily complicated. How much of a credit you'll be able to claim will depend, in part, on three separate factors: the weight of the vehicle, its fuel economy, and its projected lifetime fuel savings, Luscombe said.

Home improvements: But there is an overall limit, and restrictions within that cap, Luscombe said. For example, the overall lifetime credit is capped at $500 per taxpayer. But the credit is really equal to 10 percent of the cost of the purchase. And there's a $200 limit that applies to windows.

So if you spend $1,000 on new energy-efficient windows, the maximum credit you may claim is $100 (10 percent of $1,000). If you spend $5,000 on new windows, your maximum credit is $200 (because of the $200 cap on windows).

Solar energy: There's a separate provision for solar-powered hot-water heaters. It's equal to 30 percent of the cost, to a maximum of $2,000. So if you spend $3,000, your maximum credit will be $900.

Overall, the tax breaks in the Energy Policy Act of 2005 are intended to help you save money on energy and on taxes, too, Luscombe said.

Although many provisions don't take effect until January, they could turn out to be popular — especially if energy costs remain at or near their recent record levels. In the meantime, look for manufacturers, retailers and others to gear up extensive advertising and marketing campaigns in the months ahead to promote the breaks as a way to help sell their products.

TODAY'S TIP: Today's MoneyLine offers only a summary of some of the provisions in the legislation. You can read a more detailed description at this House Web site: www.house.gov/jct.

MoneyLine correspondent Neil Downing is a staff writer for The Providence Journal in Rhode Island and author of "The New IRAs and How to Make Them Work for You." Do you have questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail moneyline@projo.com.

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