• Under the Energy Policy Act of 2005, the tax incentives for new-car purchases apply only to specific energy-saving or otherwise environmentally friendly vehicles. To take the tax credit, your car must be a new purchase. Used and leased vehicles do not qualify. The amount of the credit or deduction you can receive on your taxes depends upon the make, model and type of car you purchase.
  
  

Eligible Vehicles

• To claim the credit for a new-car purchase, your car must be either a hybrid, fuel-cell, advanced lean-burn technology or alternative-fuel vehicle. An example of an alternative-fuel vehicle is a car or truck that runs on biodiesel. Major car manufacturers such as Volkswagen, Mercedes-Benz, Audi and Dodge offer biodiesel vehicles. Advanced lean-burn technology vehicles have internal combustion engines that the manufacturer specifically designed to use more air than fuel, such as the Volkswagen Jetta 2.0L TDI.
  
  

Credit Amounts

• The credit amount varies widely depending on purchase date and make and model. The credit amounts generally range from $300 up to $4,000. To take the credit, you must have the bill of sale and fill out IRS Form 8910-Alternative Vehicle Credit. You do not have to itemize your deductions to take this credit. Also, you only take this credit one time, not any additional years you own the vehicle
  
  

Phase Out

• The tax credit for new cars begins to phase out when the manufacturer sells 60,000 of its hybrid, fuel-cell, alternative-fuel or advanced lean-burn technology vehicles. If consumers purchase their alternative-fuel vehicle before the phase-out, they are eligible to claim 100 percent of the tax credit. When the manufacturer reaches the 60,000-vehicle mark, the IRS reduces the credit to 50 percent for a period. After the 50 percent period expires, the IRS will reduce the credit down to 25 percent. The IRS lists credit phase-outs and schedules, according to the manufacturer, on the IRS website.