People purchase electric cars, or EVs, for a variety of reasons. Some are trying to cut down on their carbon emissions footprint. Others are trying to get a jump on EV mandates that start to take effect by the end of the decade under an executive order from the Biden Administration. But choosing an EV as a new car purchase can also be financially beneficial.
Currently, the federal government is offering significant tax credits to people who buy new electric cars. Because of this, you could be saving quite a bit the next time tax season rolls around. Knowing how to qualify for the credit can help you decide on an electric car purchase.
What is the Electric Vehicle Tax Credit?
The federal government, at times, has offered tax credits to those who purchase alternative energy vehicles. The Energy Improvement and Extension Act of 2008 included an incentive for those who buy a battery-electric vehicle. This credit was available to anyone who purchased a new EV to reduce the financial burden for electric cars that cost more than gasoline-only equivalent models.
As of 2021, the credit is still in effect for many new EV models. However, some exceptions are important to understand. Making sure that you get the tax credit you are entitled to can offset some of the costs of purchasing a new electric vehicle and make it more accessible to some people.
How Much is the Tax Credit?
The federal EV tax credit is calculated based on different factors. However, most people who file their federal taxes and buy or lease a new EV are eligible for a credit of up to $7,500. Depending on your tax circumstances, you could be getting up to $7,500 taken off for the purchase of an eligible vehicle. For some people, this could make getting a new electric car a more enticing financial proposition.
However, there are different amounts for different types of vehicles.
For example, some plug-in hybrid models will only get you a $4,500 tax credit instead of the full $7,500 for a fully electric car. But the Jeep Wrangler 4xe PHEV, on the other hand, receives the $7,500 credit because of the size of its battery.
How is the Tax Credit Redeemed?
Under the current system, the federal tax credit isn't awarded instantly upon purchasing or financing a new EV. Instead, it goes on the tax return for the year when the vehicle was first registered to you. That's unlike certain state, local, and utility rebate programs.
Those who report the tax credit on their return will see it applied to their bill or have it issued as part of the standard refund, barring any overdue liabilities from the Internal Revenue Service (IRS). But it could mean headaches if you've never filed before or haven't filed federal taxes in more than a year.
In the case of new PHEV, EV, and fuel cell leases, the tax credit is usually worked into the car's value at the time of the lease signing. So while it's the quickest way to reap the tax credit benefits, leasing means the incentive cannot be applied to your tax return.
How is the Tax Credit Calculated?
While the $7,500 figure is the most publicized part of the tax credit, it's the absolute maximum you'll receive towards a new EV. Some cars are eligible for the credit but at a lower amount. Just because you buy an electric vehicle or plug-in hybrid, that doesn't mean you will be getting the full credit.
There are a few different factors that determine how much credit each car is worth. Some models aren't eligible, which could be a significant deterrent to purchasing for some people. The IRS determines the amount for each qualifying vehicle model and will apply it to your tax return accordingly.
What Qualifies a Vehicle as an EV?
Many new cars use some plug-in electric drive power instead of being powered entirely by an internal combustion engine powertrain. Hybrids, for example, use a combination of a standard engine and regenerative braking, which generates power through the brake mechanism of the car, to charge a battery that powers an electric motor. However, these vehicles do not qualify as EVs. For a vehicle to qualify as an EV, it must use a battery and electric motor as a power source.
In addition, it must be capable of either being plugged in to recharge the battery or be fueled by hydrogen to power the motors in fuel cell vehicles. Plug-in hybrid vehicles (PHEV), which can be charged but still use an internal combustion engine for some propulsion, typically qualify for a reduced tax incentive.
The main factor that the IRS uses to calculate the EV tax credit is the battery size. That's because the size of the battery will determine how far the car can be driven on one charge and how much gasoline or diesel won't be consumed. So knowing the battery size of the EV you're thinking of buying can help you figure out how much of a credit you are eligible for.
Battery size is measured in kilowatt-hours, or kWh. The credit is a base payment of $2,500 for the first five kWh and another $417 for each additional kWh. This credit caps at $7,500 no matter how much larger the battery is.
The EV tax credit is now only offered for models made by certain manufacturers because the credit expires after a certain amount of sales made by a particular company. Generally, as soon as a company sells more than 200,000 units of an electric vehicle, the credit will no longer apply.
However, this doesn't happen right away. The credit still applies during the fiscal quarter that the first 200,000 units are sold and into the next one. Then, the incentive gets a 50% cut for the next two quarters. Then, the credit is reduced to 25% of the original value for the next two quarters before it's phased out completely. That's why if you find an electric vehicle that you like, it is best to move quickly and make sure you get it before the tax credit expires.
Which EVs Do and Don't Qualify for the Tax Credit?
As of 2021, most new electric vehicles are still eligible for the federal tax credit. That includes models that start around $40,000, like the Hyundai Kona Electric, Kia Niro EV, and Volkswagen I.D.4. It also includes higher-priced vehicles such as the Porsche Taycan and Polestar 2.
However, a few manufacturers have reached the threshold of sales that disqualify buyers from receiving the credit. Because of their popularity, they have sold past the 200,000 unit limit and are no longer eligible. As of September 2021, these are EVs and PHEVs from General Motors and Tesla, including popular models like the Chevy Bolt EV and Tesla Model 3 and Model Y.
Check the IRS website before purchasing an EV to ensure the model you are buying is still eligible for the tax credit. The list changes as more EVs are sold, so it's essential to be sure your model hasn't gone over the threshold.
Who is Eligible for the Electric Car Tax Credit?
Electric Car Owners:
Full-electric vehicle owners are eligible for the highest amount of tax credits at the end of the year. It means that your vehicle needs to be powered entirely by battery technology or hydrogen fuel cell, like a Toyota Mirai or Hyundai Nexo. These are also the vehicles that will require the most electricity off the power grid and, in some cases, specially installed chargers in the home.
Buyers of a new EV can offset some of the upfront costs of these vehicles with the federal tax credit. So even though it won't be applied at the point of sale, you can still end up saving money with a combination of the tax credit amount as well as the lower cost of day-to-day operation.
Plug-in Hybrid Electric Vehicle Owners:
A plug-in hybrid, or PHEV, is an electric vehicle that also features an internal combustion engine. Unlike traditional hybrids, though, they can also be plugged in and charged from your home's household power. That theoretically lessens the amount of help needed from the engine itself to charge the vehicle.
Many plug-in hybrids are going to be eligible for the tax credit as well. However, some of them will get you significantly less than the credit you could get for a fully electric vehicle. For example, the Ford Escape Plug-in Hybrid comes with a $6,843 credit, and the Hyundai Ioniq Plug-in Hybrid comes with a $4,543 credit. These PHEVs may use less electricity to charge, so this should be taken into consideration.
Fuel Cell Vehicle Owners:
Fuel cell vehicles are generally medium-to-heavy-duty SUVs and trucks. They are becoming more popular with smaller SUVs, which use oxygen and hydrogen to generate power. Some of these vehicles have eligibility for a federal tax credit of up to $8,000. There are many requirements for this credit, though, and it is mainly for use with fleets for shipping and other industrial applications.
Who is Not Eligible for EV Tax Credits?
Not everyone who purchases an electric vehicle will be able to take advantage of the tax credit. There are quite a few exceptions to eligibility. It's especially true if you are purchasing an electric car and are counting on the credit to help pay for some of the upfront costs of the vehicle.
Tesla and General Motors EV Owners
Since electric vehicles have gotten so popular, the tax credit for some of the more successful brands has already begun to phase out. Tesla, for example, has sold well over the 200,000-unit mark. Because of this, Tesla buyers are no longer eligible to receive the credit. The Nissan Leaf and upcoming Ariya EV could push that automaker over the limit, too.
General Motors has also exceeded the maximum number of units sold to qualify for the credit, so models like the Chevrolet Bolt and upcoming Cadillac Lyriq and GMC Hummer EVs are currently ineligible, too. So if you're set on receiving the credit, you may be better off purchasing an EV like the Ford Mustang Mach-E or Audi E-tron, as these models are still eligible for it. In addition, these more recent vehicles will be much more likely to qualify for the credit for longer since they have not been around as long as the Tesla or GM cars.
People who buy hybrids will not be eligible to receive the credit. Hybrid vehicles like the Toyota Prius do not use any household power to recharge their batteries but rely on an internal combustion engine much of the time. Traditional gas-electric hybrids once received a federal tax credit, but their popularity long exceeded the cap on sales.
Used EV Buyers
If you buy your electric vehicle second-hand, you will also not qualify for the tax credit. That's because the credit goes to the person who was the original buyer, and it can not be given twice. So if you are considering purchasing a used electric vehicle, don't count on the tax credit to help pay for the extra electricity bills.
However, there are discussions of extending the tax credit to used EVs. And some state and utility programs offer rebates towards the purchase of pre-owned electric cars and incentives for home EV charging.
What is the Future of the EV Tax Credit?
While some EV manufacturers have already exhausted the tax credit, there is talk about offering even more financial incentives for switching to an electric car. For example, the current White House administration proposed an instant rebate for purchasing a new electric vehicle. That would allow buyers to see the savings right away instead of waiting for the end of the tax year.
Many lawmakers in the Senate have also talked about eliminating the rule of disqualifying manufacturers after selling 200,000 units. That would bring the tax credit back for people interested in buying a Tesla, one of the most popular electric vehicle brands.
Aside from reducing emissions and helping the environment, there are many benefits to purchasing an electric car. Being able to save some money on your federal income tax is just one of the financial advantages that can come with moving away from fossil fuels. Understanding everything you might be entitled to when buying one of these cars is the best way to get the most out of your new EV.