Electric Vehicle Tax Credits: What You Need to Know
Electric Vehicle Tax Credits: What You Need to Know
Buying the right electric vehicle can help you save up to $7500 on your annual tax bill. Yes, you read that right. Since 2010, the United States government rolled out a program that offers up to $7500 in tax credits to individuals that buy electric vehicles.
The government uses this program called the federal electric vehicle tax credit, to incentivize individuals to buy more fuel-efficient and environment-friendly vehicles. Some state governments have also initiated similar programs with additional tax credits to encourage the purchase and use of EVs. But not all automakers' EVs qualify for federal government tax credits. Some have already been phased out of the program and the tax credits decrease depending on the company's total electric vehicle sales from 2010. The good news is that many vehicles still qualify for these tax credits.
In this article, we`ll discuss what vehicle tax credits are, how they work, and how you can enjoy the benefits too.
What Are Electric Vehicle Tax Credits?
Tax credits reduce the amount of income tax an individual owes to the governments — could be federal or state, or both. The government uses tax credits to encourage or reward behaviors that it considers beneficial to the economy, environment, or any other purpose that's important to the government.
Electric vehicle tax credits are non-refundable tax credits (these are items directly deducted from your tax liability until the tax due is $0) that you earn when you buy a vehicle with a battery propulsion system that draws power from an external energy source. In most cases, these tax credits cover your tax bills throughout the year, but there are requirements, which you must satisfy before you`re able to claim them. We`ll go over this later.
How Do Tax Credits Work?
A tax credit is a dollar-for-dollar reduction of the income tax that a person owes the government. If for instance, you bought an electric vehicle eligible for an $8500 tax credit and your total federal taxes for that year sum up to $8500, you would owe only $500 to the government. Also, if you owe $1,000 in federal taxes but your tax credit eligibility is $1,000 tax credit, your net liability becomes zero. This means that you owe nothing to the government.
While electric vehicle tax credits are non-refundable, some credits, such as the earned income credit, are refundable. As a result, the government pays you the balance after the deduction, just as you would pay up the balance when your tax credit eligibility is below your entire tax bill. For example, if your total tax is $400 and your earned income credit is $1,000, you will receive a $600 refund.
How Many Credits Does a Vehicle Qualify for?
The amount of credits or federal tax incentive that any car qualifies for typically depends on the size of the battery in that car. Remember that some EVs have been phased out and no longer qualify for this incentive. The base incentive for any car that qualifies is $2500. And for every extra 5 kWh of battery capacity after that, the vehicle will qualify for another $417 of credits. The total electric vehicle tax incentive that any vehicle can qualify for is a flat $7,500 credit.
However, it's only worth $7,500 to an individual whose tax bill at the end of the year is $7,500 or more. Let's say you buy a Jaguar I-Pace or any other eligible electric vehicle and you owe $7,000 in income tax for a particular year. That's all the tax credit you’ll get and the unused portion of the credit cannot be applied against your taxes for the following year.
Also, once an electric vehicle manufacturer sells up to 200,000 units of cars (could be a particular car or a mix of models) that qualify for the tax incentive, it will begin a phase-out process that eventually makes the automaker non-eligible for the tax rebate. In this case, the available tax credit for that manufacturer is reduced by 50% for two consecutive quarters, and then 25% for the next two quarters. At that point, vehicles made by that manufacturer will no longer qualify for the federal government tax credits.
How Do I Get the Electric Vehicle Tax Credit?
You can claim the electric vehicle tax credit when you file your federal tax return. Note that your tax liability limits the amount of electric vehicle tax credit that you can claim. This means that you can't claim a credit higher than what you owe in taxes. There`s a dedicated IRS form for the credit — the Qualified Plug-in Electric Drive Motor Vehicle Credit Form 8936. If your vehicle is only used for your personal purposes, you'll also be required to report the credit amount from this form on your 1040 Individual Income Tax Return form.
As mentioned earlier, the federal tax credit is non-refundable, so it can't be applied to your tax refund. In essence, the excess EV tax credit that you are eligible for in a year won`t be credited back into your purse if your total tax bill for the year is less than that amount. For instance, if you`re eligible for a tax credit of $6000 for your new electric car, and you only owe $3000 in taxes, you are eligible to claim only $3000 of the credit. The only benefit is that you can avoid paying what you owe, but you can't claim a refund for the rest.
Fine Print for EV Tax Incentives to Keep in Mind
There are some fine prints or rules that apply to the federal tax credit, which you need to know before making a purchase:
- If you're leasing an eligible electric vehicle, the credit can only be claimed by the manufacturer offering the lease, since they are the actual owner of the car. This is because the tax credit has already been factored into the cost of the lease, meaning the customer will benefit indirectly from the incentive.
- If you`re buying an electric vehicle in order to resell it, then you`re not eligible for the incentive. Tax credits are for owners only.
- Since the incentive is an initiative of the U.S government, you must use the car mostly in the U.S. to qualify for the federal electric vehicle tax credit
- The manufacturer of the EV must be qualified for your car to be eligible. Remember there`s a phase-out process after a certain volume of sales.
- The battery of your new electric vehicle must be able to store at least 4 kWh of energy.
- Another qualifying criterion is that the battery of the car must also be rechargeable by an external source of energy.
- The IRS reserves the right to deny an electric vehicle tax credit claim as it deems fit.
- For plug-in and battery electric vehicles, they must be built by a qualified manufacturer to be eligible for the full amount of $7,500.
- Some local and state electric vehicle tax credits apply to businesses. So, a business can enjoy a certain level of tax exemption as a reward for owning an electric company car.
What Vehicles Currently Qualify for the Federal Credit?
As of March 2021, if you own a battery-electric or plug-in hybrid vehicle, you`re eligible to claim the federal electric vehicle tax credit. Note that regular hybrid vehicles do not qualify. There are other requirements such as the vehicle having a curb weight of under 14,000 pounds, a battery capacity of more than 5 kWh, and can be recharged from an external energy source — among other regulations — it qualifies for the credits.
Still, wondering if your EV qualifies for the tax credits? Here are some popular models.
Do Electric Vehicle Tax Credits Run Out?
Yes, they do run out. An EV that qualified for the federal electric vehicle tax credit in 2020 may not qualify in 2021. This is because the government is gradually phasing out the electric vehicle tax credits as sales increase from manufacturer to manufacturer.
The government believes that the high initial cost of introducing new technology to these vehicles will generally drop as economies of scale improve with more sales. Note also that the phase-out program is run specifically per company, so the expiration date for each manufacturer is different, and only begins after the automaker sells 200,000 qualified vehicles.
In July 2018, Tesla hit the milestone. They were the first. Therefore, you won't find any tesla federal tax credit in 2021.
Can Electric Vehicle Tax Credits Be Passed On?
No, you can`t pass on any unused EV tax credit to the next owner of the car, even if you transfer the title to a family member. Only the original purchaser of the EV can claim the credit.
California Electric Car Rebate
You can also enjoy tax credits from other states. For instance, In California, individuals who buy or lease a new EV qualify for a $2,000 cash rebate in addition to the federal tax credit. Plug-in hybrids are only eligible for $1,000 rebates under California's clean vehicle rebate program. This is because they sometimes burn gasoline.
If you're interested in buying an electrical vehicle, read our another article about 11 BEST ADVANTAGES OF ELECTRIC VEHICLES - EVS?