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What is the Electric Vehicle Tax Credit?

The electric vehicle tax credit is still available—despite what you may have heard. But its availability—and amount—depend on the specific vehicle you choose to buy.

By Kristina Russo | American Express Credit Intel Freelance Contributor

7 Min Read | June 26, 2020 in Life

Electric Vehicle Tax Credit

 

At-A-Glance

The Plug-In Electric Drive Vehicle Tax Credit encourages Americans to buy electric cars by refunding up to $7,500 in income tax.

Two car makers have begun phasing out of the credit, but many eligible cars are still on the market from other manufacturers.

Do you still get a pang of excitement—or, perhaps, envy—when one of those hot electric sports cars pulls silently alongside you at a red light? And, like me, did you think you missed out on the chance to save thousands of dollars on your next car purchase because the electric vehicle tax credit is supposedly expiring? Fear not: this tax credit is tied to sales of individual vehicle makes and models, so while the sexiest cars may be losing their credits, there are still plenty of options.

 

The electric vehicle tax credit is part of the federal government’s campaign to help car buyers overcome the higher initial purchase price of plug-in electric cars. Why does it care? According to the U.S. Department of Energy (DOE), the average American household spends almost 20% of family expenses on transportation, and switching to an electric vehicle can reduce that since electric-powered travel costs 50% less than gasoline.1 At the same time, the government recognizes benefits from shifting the country’s dependence on foreign oil toward domestically sourced electricity.

 

But the electric vehicle tax credit is more confusing than the average tax credit, which is saying something. Much of that confusion comes from how it phases out: Each car maker phases out separately based on how many electric vehicles they sell. In the following discussion, I’ll bring you up to speed so that you don’t miss this potentially large tax saving opportunity—if an electric vehicle is on your horizon.

 

How Much is the Electric Vehicle Tax Credit?

The maximum amount of the federal electric vehicle tax credit is $7,500, based on a specific formula and subject to phase out (read on for phase out details). The formula includes a base credit of $2,500 plus an amount calculated based on battery capacity. The first five kilowatt hours of battery capacity earns you another $417 credit. Each additional kilowatt hour earns another $417 credit until you max out at $7,500.2

 

This tax credit is a dollar-for-dollar reduction in your tax bill, but it is nonrefundable, which means that it can reduce your tax bill to zero but no lower. Unused partial credits cannot be carried forward to future tax years.3 The tax credit can be used toward the alternative minimum tax if your purchase was in 2010 or later.4

 

Who Qualifies for the Electric Vehicle Tax Credit?

Taxpayers who purchase new, qualifying electric cars after December 31, 2009 can take advantage of this tax credit. The vehicle is considered to be acquired when the taxpayer takes title, which could be different from state to state. Additionally, the taxpayer must use the vehicle mainly in the U.S. Upon purchase, you’ll receive a certification from the car manufacturer or distributor that states the car’s eligibility and the maximum amount of its applicable tax credit. Because the IRS sets stringent requirements for these manufacturer certifications, taxpayers can rely on them if audited.5

 

Does the Electric Vehicle Tax Credit Apply to Used Cars?

Taxpayers who purchase used electric cars are not eligible for the tax credit, nor are taxpayers who lease a qualifying car. If you end up leasing, experts recommend you try to negotiate lower lease payments because the leasing company will get the tax credit.6

 

How Do Cars Qualify for the Electric Vehicle Tax Credit?

To qualify for the electric vehicle tax credit, the car must have a battery that can be plugged in to recharge, and the battery storage capacity must be calibrated in kilowatt hours. Clean-diesel and gas-electric hybrids no longer qualify. Other requirements include:7

  • The vehicle must be produced by a manufacturer as electric powered, not converted to electric from gas.
  • It must be classified as a motor vehicle under the Clean Air Act, primarily used on public streets. Off-road vehicles, like golf carts or rail cars, do not qualify.8
  • Gross weight under 14,000 lbs.
  • It must be propelled to a significant extent by an electric motor that draws power from a rechargeable battery with at least 4 kilowatt hours capacity.

 

Which Electric Cars Can Qualify for Tax Credits?

The phase out scheme for this tax credit is based on the number of electric vehicles sold by the vehicle’s manufacturer. The credit remains in full until the manufacturer sells 200,000 qualifying vehicles in the U.S. since December 31, 2009. Every manufacturer is required to submit quarterly sales reports to the IRS so that its threshold can be tracked. Once triggered, the phase out is tied to calendar quarters and works like this:9

  • In the second quarter after a manufacturer sells 200,000 vehicles, the applicable tax credit is reduced by 50%, to a maximum of $3,750.
  • Six months later, it is reduced by 50% again, to a maximum of $1,875.
  • Six months after that the tax credit is completely eliminated for that manufacturer.

 

As of this writing, only two manufacturers have hit the cumulative sales thresholds: Tesla and General Motors. I’ll use Tesla, which hit the 200,000 threshold in July 2018, as an example. The tax credit phase out for their electric vehicles worked like this:

  • 100% intact through December 2018
  • 50% ($3,750) for cars purchased between January 1 and June 30, 2019
  • 25% ($1,875) for purchases between July 1 and December 31, 2019

 

Since the credit is completely phased out for Teslas sold beyond January 1, 2020, the company reduced selling prices to stay competitive with other manufacturers. But there is no obligation for manufacturers to do so.

 

Other automakers are predicted to hit their thresholds between 2021 and 2025.10 Recent lobbying efforts to raise the threshold, thus extending the credits, failed to pass Congress. You can check the tax credit status of each vehicle model at the IRS’ website.11

 

How Do You Claim the Electric Vehicle Tax Credit?

To claim this credit, you must include IRS form 8936 with your tax return. If your car is solely for personal use, the form is simple, mostly requiring basic car identification information. If you were eligible for, but did not claim, your tax credit within the last three years, you may be able fix that by filing an amended tax return for the year you purchased your vehicle.

 

Don’t Forget State EV Tax Credits

Many states offer additional incentives for electric vehicles, like tax credits, rebates, vouchers, fee reductions and even high-occupancy vehicle lane exemptions. For example, Colorado residents can earn a state tax credit whether they lease or buy an electric vehicle, and California residents—the largest consumers of electric cars—can get state-funded rebates up to $7,000.12

 

Nineteen states offer such incentives, each with its own program name, formula and eligibility requirements. You can search for your state’s offerings at the Alternative Fuels Data Center database at the DOE’s Office of Energy Efficiency & Renewable Energy website.13

 

The Takeaway

If you are motivated to save money, support innovation, or reduce your carbon footprint, electric vehicles may be for you. And if they are, the electric vehicle tax credit can help offset some of the costs of your purchase.

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Kristina Russo

Kristina Russo is a CPA and MBA with over 20 years of business experience in firms of all sizes and across several industries, including media and publishing, entertainment, retail, and manufacturing.

 

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express. 

The material made available for you on this website, Credit Intel, is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.