Consumers have the potential to get up to $7,500 in tax incentives from the federal government for purchasing an electric vehicle; in addition to local credits and rebates. The amount one would get back depends on battery capacity and the individuals tax situation. This is only one example of a variety of tax incentives that are available. We love tax incentives! ENJEN has an unparalleled success rate for exceeding the median award for the typical high growth company. We are the power fueling, your long term organic growth!
How Does the Electric Car Tax Credit Work?
By John M. Vincent August 27, 2018
(John M. Vincent / U.S. News & World Report)Sticker prices for plug-in hybrid and battery-electric vehicles are, for the most part, significantly higher than those of similarly sized gasoline or traditional hybrid cars. Their purchase price becomes more competitive, though, when you factor in the federal electric car tax credit.
Before you run out and buy a new alternative-fuel vehicle, you'll want to do find out if you are eligible for the EV credit, how much credit you can get, and how to apply for the incentive. Some manufacturers, including Tesla, are nearing a cap on the number of vehicles that they can sell with the full federal tax credit.
How Much Can You Get Back?Depending on the model of car purchased and their individual tax situation, buyers can get an EV credit of up to $7,500, plus any state and local incentives. How much you get is determined by the battery capacity of the car you purchase, measured in kilowatt-hours, and your tax situation. You can find out how much a specific vehicle qualifies for at fueleconomy.gov. You should also contact a tax professional to determine how much of the available tax credit you can take advantage of.
The tax credit is only available for road-going vehicles that can be charged from an external source and have a battery pack with a capacity of four kilowatt-hours or greater. That includes battery-electric and plug-in hybrid models. Traditional hybrids that internally charge their battery packs do not qualify for the tax incentive. For example, the 2018 Toyota Prius does not qualify, but the 2018 Toyota Prius Prime does.
All mass-production, full-electric vehicles sold in America qualify for the maximum credit of $7,500. Few plug-in hybrids qualify for the full incentive. Only the 2018 Chrysler Pacifica Hybrid, the 2018 Honda Clarity PHEV, the 2018 Cadillac CT6 PHEV, and a couple of others qualify for the full credit. Other eligible vehicles typically are eligible for a credit of between about $3,500 and $6,700.
The tax credit only works for vehicles that came from the factory as an electric vehicle and are intended for use on public roads in the United States, so that Ford F-150 your neighbor converted to electricity in their garage does not qualify for the credit.
The credit only applies to new plug-in electric cars and not the purchase of used full EVs or plug-in hybrid vehicles. It does not apply to fuel-cell cars or other alternative-fuel vehicles, such as diesel or ethanol-powered vehicles.
(General Motors)The purchase price of the vehicle has no bearing on the tax break you qualify for. You’ll get the same $7,500 credit whether you buy a $100,000-plus Tesla Model S or a $36,620 Chevrolet Bolt EV.
The amount is based on the electrical energy capacity of the vehicle and not how fuel efficient the car is.
The incentive belongs to vehicle title holder, so if you lease a Bolt or Fiat 500e, the company you leased the car from will claim the credit, not you.
To qualify for the full amount available, you must have a federal tax liability in the year you purchase the vehicle that meets or exceeds the incentive amount. If the EV has a $7,500 tax credit available, and you only have a tax liability of $2,500, you can only take a $2,500 vehicle tax credit. Excess credits cannot be carried from year to year. The incentive is a one-time offer. You can only claim the tax credit the year you purchase the EV.
If you do not have a federal tax liability, some experts suggest moving money from your traditional IRA account to a Roth IRA to create a tax liability that you can use the credit to offset. Traditional IRAs are taxed when you withdraw funds. Roth IRAs are funded with already-taxed dollars and their earnings grow tax-free.
How Do You Get the EV Tax Credit?The Federal EV Tax Credit is not a rebate on the price of the car that you get instantly when making the purchase. You have to apply to receive it when you file your annual tax return. You or your tax professional will fill out an IRS Form 8936, which is submitted with your return. Since it is a tax credit, you have to wait until you file your next year’s return before you will receive the tax incentive.
If you file your taxes yourself, be sure that your tax preparation software includes the proper forms and ability to apply for the credit. Not all do. You cannot claim the tax credit until you take delivery of the new vehicle. Deposits and prepayments do not count.
Will the Credit Last Forever?Each vehicle manufacturer is allowed to sell up to 200,000 qualifying plug-in electric vehicles (battery-electric cars and plug-in hybrids) before the EV tax credit on their products begins to phase out. The total is by manufacturer, not brand, so, for example, the total for General Motors includes Chevrolet Bolt EV, Chevrolet Volt, Cadillac ELR, Cadillac CT6, and Chevrolet Spark EVsales.
How the electric car tax credit phase-out works is a bit complicated. It happens over a one-year period starting at the beginning of the second calendar quarter after the manufacturer hits the 200,000-unit threshold. At that time, the tax credit available to buyers drops to 50 percent of the original incentive available and continues at that level for the next two quarters. In the third and fourth quarter of the phase-out period, the tax credit drops to 25 percent of the original amount.
After the phase-out period, no battery-electric vehicle or plug-in hybrid manufactured by the automaker is eligible for the tax credit.
Currently, a few manufacturers are approaching the limit. Though Tesla does not report U.S. sales numbers, recent regulatory filings suggest that they will hit the threshold in the coming months. In other words, most of the Tesla Model 3 reservations holders waiting for their new cars will likely not be able to take advantage of the credit.
(Nissan North America, Inc.)Also approaching the limit are General Motors and Nissan. The most popular EV models for GM include the Chevrolet Bolt EV and Chevy Volt. Nissan currently sells one of the most popular EVs in the world, the Nissan Leaf, and its U.S. sales are expected to bring it close to the limit in the next few years.
It’s unknown what effect an expiring tax credit will have on buyers. The additional price might not bother a Tesla buyer purchasing a $100,000 Model S or Model X, but it may have a chilling effect on the sale of $35,000 Model 3 EVs.
It’s unlikely there will be a push at the federal level to extend the electric car tax credit program. Several states, however, are upping their incentives to take some of the sting out of the loss of federal credits.
Federal Credits Aren’t the Only Tax CreditsDepending on where you live, you may be able to take advantage of generous state and local incentives to purchase a new full EV or other plug-in vehicle. Colorado is currently the most generous of the states, offering a credit of up to $5,000 that can be used in conjunction with the federal tax credit to save you up to $12,500 off the price of the car.
In some cases, the incentives come in the form of an instant vehicle rebate. Instead of waiting until the next tax filing year, you’ll instantly see a reduction in the price of the EV, as the state government provides the payment directly to the dealer.
In addition to tax credits, some states and municipalities offer reductions in sales or excise tax, access to carpool lanes, and free or reduced-price parking. Many states offer credits or rebates if you install an EV charging station at your home or business.
Before you buy a battery-electric or other plug-in car, be sure to check with your local utility. They might also offer you credits, discounts, or time-of-use rates that can lower your cost of energy.
Alternative-Fuel Vehicle Shopping Tools From U.S. News & World ReportWith the growing number of full EVs and plug-in hybrids available, you need a resource to show which models are good enough to earn your money. Our ranking of hybrid and electric cars shows you the best mainstream models you can buy. For buyers with larger budgets, our ranking of luxury hybrid and electric vehicles shows you the models you should have on your shopping list.
Low gas prices have put a damper on the sales of some high-mileage vehicles. Explore our car deals page to see the best financing and cash back offers extended by automakers. Though you’ll likely have to give up the federal tax credit, leasing is an excellent way to get behind the wheel of an EV. Our lease deals page will help you find great lease offers with low monthly payments, small amounts due at signing, or both.
The U.S. News Best Price Program connects car buyers with local dealers providing guaranteed savings. It works for both leasing and purchase customers, who have saved an average of $3,106 when they used the program
ENJEN.US is committed to sharing news surrounding the use of government incentives for growth responsibly.
Other News in Incentives