How Does the Electric Car Tax Credit Work?

Woman charges her car

There are plenty of good reasons to buy an electric car, but for many drivers, the high sticker price of EVs can be a dealbreaker. Even though lifetime fuel and maintenance costs are lower for electric cars than for conventional cars, drivers may have to pay more up front or take out a larger loan to buy one.

That’s where EV tax credits come in. In order to incentivize the purchase of new EVs, the federal government offers a tax credit to make EVs more affordable. Some states and private companies also offer incentives of their own.

But before you go placing an order for a new Tesla, it’s important to do the math and understand how the electric car tax credit works. Not all electric cars are eligible, and not all drivers will benefit equally from the same tax incentives. Here’s what you need to know to find out how to make the most of the electric car tax credit.

How Does the Electric Car Tax Credit Work?

If you’re asking yourself, “How does the electric car tax credit work?”, you’re probably thinking about the federal tax credit, or the Qualified Plug-In Electric Drive Motor Vehicle Credit, as it’s called by the IRS. Filers claim the credit using the IRS form IRC 30D.

This credit has been around for more than a decade, and was expanded as part of the American Recovery and Reinvestment Act of 2009 and the American Taxpayer Relief Act of 2013. Drivers can qualify for an income tax credit of up to $7,500 after purchasing an eligible light truck or passenger vehicle.

But as with many electric vehicle incentives, conditions apply. Be sure to double-check your eligibility and federal income tax situation before factoring it into your budget.

Which EVs Are Eligible?

The federal electric car tax credit can be applied to some of the most popular EVs on the market today, including the Nissan LEAF and the BMW i3.

There are some conditions that the car must meet to be eligible. 

Here are main criteria to keep in mind:

  • The car must be a battery electric vehicle (BEV) or plug-in hybrid (PHEV) with a battery capacity of 5 kilowatt hours (kWh) or more
  • The car must be purchased new
  • The car must be purchased after December 31, 2009
  • The car must be driven primarily in the U.S.
  • The manufacturer must have sold less than 200,000 qualifying vehicles

If there’s any doubt whether the make and model that you’re interested in will qualify, you can head to this EPA website to see a comprehensive list.

Which Cars Are Excluded?

Let’s go over a few situations that are not covered by the tax credit so you don’t miss out on getting your credit and reducing your tax bill.

Only Some Hybrids Are Eligible

If you’re buying a hybrid electric vehicle (HEV) that can’t be plugged into a charging station, then it isn’t eligible. If it’s a plug-in hybrid, it is.

This means that the classic Toyota Prius would not be eligible, but the Toyota Prius Prime would be.

Teslas and General Motors Vehicles Are No Longer Eligible

Once a manufacturer has sold 200,000 qualifying vehicles, then the credit will phase out. First the credit is reduced by 50%, then 25%, and then it’s no longer available.

Both Tesla and GM have maxed out their credits, so all of their models, including the Chevrolet Bolt, are no longer eligible.

Stay tuned, though: Recent bills such as the GREEN Act of 2021 have proposed increasing the cap to another 400,000 vehicles.  

Used Cars and Leased Cars Aren’t Eligible

To qualify for the electric car tax credit, you must be the original owner of the vehicle and plan to drive it primarily in the U.S. This means you can’t buy a new car with the intention of reselling it or permanently moving to Canada or Mexico.

If you’re leasing a car, you won’t be able to claim the tax credit — the manufacturer will. But they may be able to factor in the credit to lower your monthly payments.

How Much Is the Electric Car Tax Credit?

Woman checking for electric car tax credits

The exact amount that a car is eligible for depends on the battery capacity of the EV. The base credit is $2,500 with an additional $417 per kilowatt hour.

In practice, this means that many vehicles, including the IONIQ Electric, are eligible for the full credit, while others are eligible for a reduced amount. For example, the IONIQ PHEV is eligible for a $4,543 credit.

You can check out the full list of eligible vehicles here. Most credits are at least $4,000, while many are between $5,000 and $7,500.

How Is the Electric Car Tax Credit Calculated?

Before moving ahead with a purchase, there’s still one more thing you need to consider: your personal tax situation. A tax credit is deducted from the amount of income tax that you owe, and it’s non-refundable.

If you only owe $1,000 in taxes in the year you claim the credit, then you’ll only get a $1,000 credit — and you won’t receive a refund for the remainder!

That means it’s a good idea to plan ahead and claim the credit in a year when you have a higher tax liability. For example, if you’re a freelancer and your income varies, you should plan to purchase your car in a year when you’ve earned more money rather than less.

The Congressional Research Service found that taxpayers earning at least $100,000 claimed 78% of tax credits. The average taxpayer needs to earn at least $66,000 per year to fully benefit from the credit.

This means that middle-income earners need to do their due diligence to ensure that they get the maximum credit possible when they file their tax return.

Other Electric Car Incentives

Two friends charging their electric vehicle

Fortunately, the Qualified Plug-In Electric Drive Motor Vehicle Credit isn’t the only incentive available to electric car owners. The U.S. Department of Energy maintains a database of state incentives that may apply to your electric vehicle purchase.

The state with the fewest incentives is Alaska with nine, while California has over 151. Some of these can be claimed in addition to the federal tax credit.

Not all incentives are for purchasing an electric vehicle. Some are for installing electric vehicle supply equipment (EVSE) in your home.

Here are just a few examples of other electric car incentives:

  • Electric Vehicle Rebate Program (CA): Eligible drivers can get up to $1,500 off the purchase price of a new EV. Some regions, such as Los Angeles, offer a similar rebate for used electric cars.
  • Clean Vehicle Rebate Program (OR): Oregon provides $2,500 rebates for used EVs and $5,000 for new EVs. These rebates are targeted toward taxpayers who earn “up to 120% of area median income.”
  • Reduced Alternative Fuel Vehicle License Tax (AZ): In Arizona, drivers pay a reduced license tax compared to conventional vehicles.
  • Electric Vehicle Emissions Inspection Exemption (CO): In Colorado, electric cars don’t have to undergo state emissions inspections.
  • MnPASS Electric Vehicle Incentive (MN): Minnesota offers $250 in toll credits to new BEVs and $125 in credits to PHEVs.  
  • Electric vehicle supply equipment (EVSE): Many states offer rebates for EV owners who install a Level 2 charging station in their home. These programs are typically administered by your local utility provider, and may cover the cost of installing a home charging station.

Some incentives are also available for businesses and nonprofits that want to purchase multiple EVs or install a DC fast charging station.

Is the Electric Car Tax Credit Worth It?

You’ll have to decide for yourself whether or not the tax credit is enough of an incentive to make it worth buying a new electric vehicle. Lower-income earners who wouldn’t get the full credit amount may be better off buying a used EV or looking for a state rebate program instead.

But remember, the sticker price isn’t the only number to factor in when comparing the cost of an electric vehicle. Electric cars also have lower fuel and maintenance costs, and can make up for their higher purchase price in just a few years.

Whichever electric car you choose, do your research to make sure that you maximize all of the electric vehicle tax credits and rebates available in your state.

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