While electric vehicles are relatively more expensive than conventional vehicles, they can save you a lot of money from gas in the long run and allow you to save on taxes. Let’s find out how the tax credit works and to what vehicles it applies.
The federal government provides financial incentives such as the federal electric vehicle income tax credit which can help you offset the costs you pay when buying an electric car. Depending on the model and capacity of the battery of the electric car, you can avail up to $7,500 tax credit.
The federal tax credit was crafted by the government to boost sales of electric cars and promote its adoption among the public. This is part of the government’s efforts to reduce carbon gas emissions to fight pollution and reduce people’s dependence on fossil fuels that is fast depleting.
How Does the Federal Tax Credit Work?
A tax credit is a type of incentive that permits a taxpayer to deduct the amount of the credit from the tax liability he or she owes the government. It is a sum of money that can be offset against your tax obligation that works as a dollar-for-dollar discount of the income tax you must pay the government.
For instance, if you owe the government $5,000 in taxes and you get a $5,000 electric car tax credit, then your net tax liability is zero. You don’t have to pay taxes to the government. However, if you are only eligible for a $3,500 tax credit, and you have a tax liability of $5,000, then you will only owe the government $1500 of tax after deducting the tax credit.
The electric car tax credit is non-refundable which essentially means you cannot get any refund of the tax credit if it exceeds your tax liability.
For example, you owe the government $5,000 in taxes and you get the full $7,500 electric car tax credit. In which case, the tax credit can reduce your tax liability to zero. However, the extra or excess $2500 credit that you have will not be reimbursed to you as cash by the government.
The electric tax credit only applies and expires in the current tax year — if they are used or not. Following the example above, you cannot use the extra $2500 electric car tax credit you have for your tax liability next year. The tax break expires within the current tax year.
Finally, the tax credit is not a reduction in the cost of the car. You will not get it in the form of a discount or cash rebate when you purchase the electric car. Instead, you need to apply it to the Internal Revenue Service (IRS), to claim the credit.
What Cars Qualify for the Federal Tax Credit?
The federal tax credit for electric cars applies to all-electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs).
The former works fully on an electric motor that gets power from a rechargeable battery. The latter combines a gasoline or diesel engine with an electric motor.
The electric car tax credit ranges between $2,500 and $7,500. The amount of tax credit essentially depends on the type or model of the vehicle and battery capacity. In general, all-electric vehicles qualify for the full credit of $7500.
Examples include the 2012 GCE Electric Vehicle, 2019 e-tron SUV, 2017 i3 Sedan (w/ 60 Ah battery). Meanwhile, plug-in hybrids like the 2014–17 i8, 2019 i8 Coupe and 2019 i8 Roadster can qualify for the credit between $3,793 and $5,669. You can learn more about what vehicles qualify for tax credit and the corresponding amount on the Federal Tax Credits (FuelEconomy) page.
Is the Tax Credit Available Every Time?
The federal tax credit for electric vehicles is a temporary financial incentive. It will be gradually phased out starting on the second calendar quarter after a manufacturer reaches the 200,000-unit threshold, which the IRS will publicly announce along with the subsequent phase-out schedule.
Only 200,000 electric cars per manufacturer are eligible for the fully electric car tax credit. So you need to make sure that you belong to the first 200,000 buyers of the electric car of a specific car manufacturer. Once the 200,000 eligible electric vehicles are sold, the federal government will start to gradually decrease the tax credit until no credit is available. That means that if the car manufacturer reaches that 200,000 mark, the tax credit available to the consumer decreases to 50% of the original full incentive in the next quarter, then 25% in the succeeding quarters until the tax incentive is finally eliminated.
In short, you need to hurry up in buying your electric car to avail of the tax credit while supplies for eligible electric cars last. You can also visit the Office of Energy Efficiency and Renewable Energy to check cars that are eligible and tax credit phased out a schedule of car manufacturers.
Is There a Tax Credit for Electric Cars in 2020?
The phase-out period for the tax credit differs for every manufacturer. As previously mentioned, it starts only when the manufacturer reaches the 200,000 units ceiling. After the phase-out period, no electric vehicle from that specific manufacturer will be eligible for the tax credit.
Tesla, the most popular electric car manufacturer in the US, has reached the 200,000 sales threshold in 2018 and is expected to phase out its all eligibility for a tax credit by the end of 2019. Incidentally, the car manufacturer has decreased the price of its electric cars to offset the anticipated loss of its tax credits.
The next to hit the 200,000 level was General Motors, which also started the phase-out of their tax credit in 2019. As of October 2019, the tax credit for its electric cars has been reduced to 25% or $1,850 and is expected to be fully phased out by March 2020. The next electric car manufacturer expected to hit the 200,000 marks is Nissan before its tax credit phase-out starts.
With the way things are running, a tax credit for electric cars in 2020 will still be available for some car manufacturers. However, a tax credit for more popular brands like Tesla and GM will no longer be available or be close to depletion respectively by 2020.
Other manufacturers such as Nissan, KIA, and BMW among others are approaching the limit and are thus expected to have its buyers enjoy the full tax credit in 2020.
There will still be tax credit for electric cars in 2020 only for specific brands and possibly with less tax credit amounts.
Do You Get a Tax Credit for Buying an Electric Car?
Yes, you must purchase the electric car to be directly eligible for the tax credit.
You can definitely enjoy a tax credit when buying an electric car provided the car meets the following considerations:
- The brand/model/manufacturer of the car you purchased has not yet fully phased out its tax credit privilege provided by the federal government
- The car is brand new or its first use starts with you as its purchaser
- The vehicle you purchased for personal use or lease and not for resale. If the vehicle is leased, the leasing company claims the credit.
- Finally, the electric vehicle is primarily for use in the United States.
Do You Get a Tax Credit for Buying a Used Electric Car?
No, the tax credit only applies to brand new electric cars. It does not apply to second-hand or used electric cars regardless of how low its mileage. Only the original purchaser of the brand new electric vehicle is entitled to a tax credit.
Even if the original purchaser did not apply for the credit, the privilege cannot be handed to the succeeding buyer. In addition, electric-car tax credits cannot be passed on to your spouse or children. The only taxpayer entitled to claim credit is the one whose name appears as the original registered owner of the brand new electric vehicle.
New cars that are only converted to electric drive are also not entitled to tax credit. Only brand new motor vehicles as defined for purposes of title II of the Clean Air Act are entitled to tax credit subject further to the following requirements: the gross vehicle weight rating (GVWR) is less than 14,000 lbs (6.25 tons) and its battery must be rechargeable and has a capacity of 4-kilowatt hours or more. Incidentally, tax credits for two-wheeled electric cars have expired in 2017.
Do You Have to Itemize to Get the Electric Vehicle Tax Credit?
You don’t need to itemize to get the electric vehicle tax credit. You simply deduct the amount of electric car tax credit directly on the federal taxes you owe the government after computing your taxable income when filing an annual tax return.
Moreover, you cannot avail of the tax credit until the brand-new vehicle is delivered and registered under your name. If you only make a deposit or prepayment to purchase the vehicle and you have not received the electric car, you cannot avail of the tax credit.
How Do I Claim an Electric Vehicle Tax Credit?
To claim the credit, you need to fill out IRS Form 8936 (Qualified Plug-in Electric Drive Motor Vehicle Credit) when you file your tax return.
The form 8936 is divided into three sections.
The first section computes your tentative credit amount, which is usually indicated in the certification provided by your electric car manufacturer.
If the qualifying vehicle is purchased for business use, the tentative credit is then allocated to your business in the 2nd section of form 8936, which must also be reported on Form 3800 (General Business Credit).
In any case, all forms are filed in the Department of the Treasury Internal Revenue in the respective state where you live during the applicable tax year. For instance, filing the 2019 tax return can be done in early 2020.
Is There an Income Limit for an Electric Car Tax Credit?
There is no income limit for the electric car tax credit. The tax credit amount will depend on the model and battery capacity of the electric vehicle and not on your income.
What is important is you must have a sufficient tax liability in your federal tax return to enjoy the tax credit because you can only claim the credit up to the amount of your tax liability. Any excess amount of the tax credit cannot be refunded.
Thus, if you cannot use part of the personal portion of the tax credit because you don’t have enough tax liability, the excess credit amount is lost. It cannot be carried in your previous tax liabilities in prior years or subsequent tax liabilities in the succeeding years.
Can You Get the Electric Car Tax Credit Twice?
Electric car federal credits are not the only tax credits available. Depending on where you live, you can get additional tax credits using other tax incentives offered by state and local governments apart from the federal electric tax credit.
The state of Colorado, for instance, provides an additional $5,000 tax credit when you purchase an electric vehicle. That can translate to $12,500 worth of tax credits when including the federal tax credit of $7,500. On the other hand, the Louisiana state government offers up to $1,500 in income tax credit.
In some cases, the financial incentives offered by state governments are in the form of a direct vehicle rebate, which is immediately deducted from the price of the electric vehicle in the form of a discount or cashback. In the case of the former, the state government makes direct payments to the dealer.
For instance, the government of Connecticut provides up to $2,000 rebate depending on the battery range while the state of Delaware gives up to $3,500 rebate, depending on the price of the electric vehicle. Other states that provide rebates included Massachusetts and New York.
In addition to tax credits and rebates, some governments in the state and municipal levels offer non-monetary incentives to electric car owners. This can come in the form of vehicle registration discounts, access to carpool lanes, special low-cost loans, and reduced-price parking among many others.
In Arizona, for instance, electric vehicles are not required to complete emissions testing. In Sacramento California, consumers enjoy a discounted rate for electricity used to charge their electric cars. In Florida, the government forbids insurance companies to impose surcharges on electric vehicles based on passenger payload and weight-to-horsepower ratio.
Buying an electric vehicle has a lot of perks and privileges that allow the owner to enjoy such as the federal tax credit and other financial incentives and benefits from state and municipal governments. In addition to these, you also get to save on fuel costs which are expected to continue to surge in the future. Most importantly, however, purchasing an electric car allows you to contribute your small share in curbing pollution and protecting our natural environment, which is a priceless gift that you can give to the future generation.
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