One of the biggest financial incentives for buying an electric car is the federal tax credit you will be eligible for! Here’s everything you need to know about it.
Electric cars may be all the craze right now, but there’s still a lot of confusion regarding their overall effectiveness. Apart from operational questions like how far EVs can travel on a single charge and their effect on the environment, customers are also looking for more financial benefits before buying electric cars. Well, you’re in luck, because the US government has been incentivizing potential EV buyers with a tax credit since 2010!
Before you start your research on the best electric cars to buy, here’s a quick lowdown on the federal EV tax credits that can help you save money.
What Is an EV Tax Credit?
The electric vehicle tax credit is a financial incentive given by the federal government to encourage more people to buy EVs. Tax credits allow you to subtract a certain predetermined amount from the total income tax you owe at the end of a financial year. Since 2010, the US government has incentivized new electric vehicle purchases with a tax credit of up to $7,500.
How Does the Federal Tax Credit for Electric Cars Work?
All EVs and PHEVs purchased from designated manufacturers are eligible for a federal tax credit of up to $7,500. The amount may vary depending on several factors like the manufacturer, type of battery capacity, whether it is a new purchase or a lease, etc.
One important thing to remember is that the $7,500 tax credit can only be availed in full if your income tax bill is equal to or more than that amount. For example, let’s suppose you bought a Hyundai Kona Electric this year, and your total income tax bill is $5000. The tax credit you are eligible for will only be $5000 – you will not get a refund for the remaining $2500.
In other words, the federal EV tax credit is non-refundable – it can reduce your tax bill to zero if it is equal to $7500, but you cannot get a tax refund on it.
How Can You Claim the EV Tax Credit?
To claim the federal tax credit, you must fill out and file IRS Form 8936 when filing your tax returns. The amount of tax credit you qualify for depends on the battery size. For example, the Audi A7 plug-in hybrid qualifies for the full $7500 credit, but the Hyundai Ioniq only qualifies for $4543.
What Vehicles Qualify for the EV Tax Credit?
Here are the main eligibility criteria for an EV to be eligible for the tax credit:
- The electric car must be for use only within the United States.
- Only EVs (electric vehicles) and PHEVs (plug-in hybrid electric vehicles) can qualify for the EV tax credit.
- The credit is only applicable to new EVs and not to resold electric cars.
- The minimum credit amount is $2500 and the maximum is $7500.
- You can only claim tax credit once for every new EV vehicle purchase.
- The EV manufacturer must be listed on the Department of Energy website, or on the IRS’s list of qualified vehicles.
- For vehicles not listed on either, you must obtain the manufacturer’s guarantee that the vehicle is eligible for tax credits. This is applicable for electric motorcycles, three-wheel EVs, and low-speed EVs.
- The EVs should have a battery capacity of at least 4kWh and should be able to recharge through EV charging stations.
As always, the IRS reserves for itself the right to reject a claim for EV tax credits in case of any discrepancies.
EV Manufacturers Whose Cars Are Eligible for the EV Tax Credit
The following are some of the automakers whose plug-in electric cars are eligible for the tax credit.
The US Department of Energy has put out a detailed list of manufacturers whose EVs are eligible, and the tax amounts buyers can claim.
Can You Get A Tax Credit If You Lease an Electric Vehicle?
No, EV tax credits can only be claimed by the owner of the car – in this case, the leasing company. The borrower cannot claim any EV tax credit, no matter how much he pays in rental fees. However, the leasing company may pass on the benefit of the credit to the customer by lowering the monthly rental amount. However, this is completely at its discretion.
Can You Get Tax Credits on Used Electric Vehicles?
No, EV tax credits can only be claimed for newly purchased electric cars and not for used electric cars.
Can You Transfer Your Federal EV Tax Credit to Someone Else?
No, you cannot transfer the EV tax credits to anyone else. Only the legitimate and original owner of an EV vehicle can claim tax credits – not someone who bought a used car. This information can help you to decide if it is worth buying a new electric car or going for a pre-owned one. The new electric car may be cheaper to finance if you can claim the EV tax credit of up to $7500.
Will EV Tax Credits Be Phased Out?
The federal tax credit program is applicable to all automakers that have sold below 200,000 electric vehicles so far. After this threshold, the federal tax credit system will be phased out in the second quarter of the succeeding calendar year. All EVs sold after this milestone will be ineligible for tax credits.
So far, only two EV manufacturers have crossed the 200,000-unit threshold – General Motors (GM) and Tesla. Hence, you will not be eligible for tax credit if you buy EVs from these two automakers.
Will Buying a Tesla Make You Eligible for EV Tax Credits?
No, both Tesla Motors and General Motors are no longer eligible for federal tax credits, because they have sold more than the threshold limit of 200,000 units.
Do States Provide Other Tax Credits?
Even if the federal tax credit program is phased out, different states have different incentives for buying electric cars, which you can see in this interactive map. These include tax rebates, exemption from registration fees, discounted vehicle taxes, and more.
For example, the City of New York offers EV rebates of up to $2000 for buying a new EV. Los Angeles Department of Power also offers rebates for buying eligible used EVs.
Does the Tax Credit Apply to Hydrogen Fuel Cell Cars?
Yes, the $7,500 tax credit also applies to hydrogen fuel-cell cars. However, it’s important to check the US Department of Energy’s website and see if you live near a hydrogen refueling station – otherwise, it doesn’t make sense to invest in a hydrogen fuel cell car. Some good models include the Hyundai Nexo, Honda Clarity, and Toyota Mirai.