Last August, President Bush signed the Energy Tax Incentives Act of 2005, which provides tax breaks for individual homeowners purchasing and installing energy-saving devices in 2006 and 2007. Additionally, the old $2,000 deduction for hybrid cars has been replaced with a series of new tax credits in 2006. If you are thinking about a new car or an upgrade to your home, you may want to consider some of these rules before making a purchase.

RESIDENTIAL ENERGY CREDITS

Solar energy. If you convert your primary residence to solar energy, you can receive three different types of credits. For example, should you purchase and install solar water heating equipment, you would receive a 30% credit, up to a maximum of $2,000 per year. A similar credit can be obtained by purchasing and installing electricity generating solar photovoltaic equipment. In addition, you would receive a $500 credit for each 0.5 kilowatt of fuel cell property capacity.

The first two credits apply to any home that you own, while the fuel cell credit is allowed only for a primary residence. Keep in mind, too, that these credits cannot be used to heat a swimming pool or a hot tub.

HOME IMPROVEMENT CREDITS

Energy conserving items that you place in your primary residence also may qualify for credit. This credit may total 10% of expenses for improvements to an existing home plus 100% of the expenses for energy efficient property. The total lifetime credit awarded, however, cannot exceed $500.

Eligible improvements include metal roofs coated with heat-reduction pigments, exterior doors, exterior windows (including skylights), and insulation to reduce heat loss or gain. Another calculation to consider: The lifetime credit for windows is limited to $200.

Energy efficient property includes electric heat pumps, electric heat pump water heaters, geothermal heat pumps, and central air conditioners, which offer up to $300 in credit. You also may receive up to $150 of the expenses for natural gas, propane and oil furnaces, and qualified hot-water boilers—and up to $50 for advanced main air circulating fans.

ENERGY-EFFICIENT VEHICLES CREDITS

Hybrid vehicles. Effective in January, the average consumer can now receive credit for purchasing or leasing hybrid motor vehicles. Prior to 2006, it was only a deduction for purchases. There are two components to this credit. The first, ranging from $400 to $2,400, is based on the percentage increase in fuel economy from a 2002 all-gasoline model. The second is a conservation credit based on lifetime fuel savings ratings, ranging from $250 to $1,000. Since the list of approved vehicles changes often, check with your auto dealer and the Internal Revenue Service website, www.irs.gov, for the most up-to-date information.

The rest. The remaining three types of vehicle credits are not readily available to the average consumer. However, while limited in supply, they can generate large savings.

"Lean burn technology" vehicles. With these modes of transportation, engines utilize a fuel mix rich in air. Some new diesel cars will qualify for this credit. Tax credits are similar to hybrid calculations and run between $650 and $3,400.

Alternative fuel vehicles. Up to $4,000 in credits are available for vehicles running on alternative fuels like natural gas, petroleum, hydrogen, or any mixture of at least 85% methanol.

Fuel cell vehicles. A maximum of $12,000 in tax credits is available for qualified vehicles that incorporate hydrogen and other fuel cell technologies.

THE ADVANTAGE

With the new law, tax incentives are considered credits instead of deductions. Credits provide dollar for dollar relief from the tax liability, whereas deductions only decrease taxable income.