The federal government does provide tax incentives for “Clean Fuel” vehicles. In 2003 tax deductions of up to $2,000 were available to consumers who purchased new vehicles certified by the IRS which include the Honda Insight, Honda Civic Hybrid or Toyota Prius. Under the current law the incentives will gradually be phased out beginning this year as the deduction is scheduled to be dropped to $ 1,500; vehicles purchased in 2005 up to $1,000. Deductions are expected to fall to $500 in 2006.

Itemization is not necessary although the benefit is taken as an adjustment to income. Deductions must be made on a 1040 Form and identified on line 34 as “clean fuel.” Vehicles purchased strictly for business use should be claimed in Schedule C (1040) or Schedule F (1040) on the "other expenses" line.

Requirements for tax exemptions include:

• the vehicle must be purchased new, not used or for resale
• the vehicle must be driven mostly in the United States
• the vehicle must meet all federal and state emissions requirements
• Government agencies, tax exempt organizations, and foreign entities are not eligible Source: U.S. Department of Energy

Currently legislation under the CLEAR Act is being considered by Congress to alter and extend the incentives for buying hybrid vehicles. In addition, many state and local governments may provide other incentives for alternative and hybrid fuel vehicles.