How do electric car tax credits work?

Mom and child using tablet while charging electric carImage: Mom and child using tablet while charging electric car

In a Nutshell

Electric vehicles can be expensive compared to conventional vehicles, but they can save you a good chunk of change on gas. And financial incentives — like the federal electric vehicle income tax credit and local rebate programs — could help you offset some of the costs. With the federal electric vehicle income tax credit, you may qualify for up to $7,500 back, depending on the make and model you buy.
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Although an electric vehicle can be an expensive investment, you may qualify for financial incentives that could help you get some cash back.

If you qualify, the federal Qualified Plug-In Electric Drive Motor Vehicle Credit could give you back up to $7,500 when you file your federal tax return. And depending on where you live, you may qualify for additional state, city and utility-company incentives, like rebates and discounts.

Let’s take a look at what the federal electric vehicle tax credit (or EV tax credit) is, which cars qualify and additional incentives that may be available to you.

What is the electric car tax credit?

To encourage sales of plug-in electric vehicles, also known as electric cars or EVs, the federal government began offering a federal income tax credit in 2010 for eligible electric vehicles purchased after Dec. 31, 2009. The amount of the tax credit can’t exceed $7,500 per vehicle.

Several factors can affect the amount of the tax credit for an eligible vehicle, but here are two.

1. Battery capacity You can look up the tax credit associated with a specific make and model with this handy guide.

2. Tax obligation The credit is nonrefundable, so while it could drop your federal tax liability to zero, it won’t contribute to a potential tax refund. For example, if the tax credit for a Kia 2019 Niro EV is $7,500, but your federal tax obligation for the tax year in which you bought the car is only $4,500, you’d only be able to claim a tax credit of $4,500.

Keep in mind that a tax credit is not a rebate — you won’t receive cash back or a discount when you buy the car. After you purchase your EV, you’ll have to complete and file IRS Form 8936 with your federal tax return to claim the credit. If you’re not sure how to complete the form, ask a tax professional. 

Which cars qualify for federal tax credits?

There are different factors that qualify a vehicle for the federal electric vehicle income tax credit. For example, a vehicle may qualify for the federal electric vehicle income tax credit if it’s an all-electric or plug-in hybrid vehicle that runs off a battery with at least 5 kilowatt hours. Take note though, some models will begin to phaseout once the manufacturer meets a threshold — more on that below.

All-electric vehicles run only on electricity, while plug-in hybrid electric vehicles, or PHEVs, run on a combination of electricity and fuel.

Qualifying vehicles must also be …

  • Brand new The tax credit is only available to the original owner of a new vehicle (while leased vehicles qualify, the leasing company gets the tax credit, not you)
  • Purchased after Dec. 31, 2009 You must have purchased the vehicle after Dec. 31, 2009, and began driving it in the year you claim the credit
  • Driven primarily in the United States

Tax credit phaseout

The federal tax credit starts to phase out for a manufacturer’s vehicles at the beginning of the second calendar quarter after the automaker has sold 200,000 qualifying vehicles since Jan. 1, 2010.

For example, the Qualified Plug-In Electric Drive Motor Vehicle Credit (also referred to as the IRC 30D) for General Motors electric vehicles has ended if purchased after March 31, 2020.

Before you buy an electric car, check out the Federal government’s latest tax credit information to see if tax credits for the vehicle you want have begun to phase out and what credit amount might be currently available.

Some examples of vehicles that may still qualify for a tax credit

Although it’s important to check the Federal website for the latest credit information, here are a few of the many vehicles that may still offer a full tax credit, along with the credit amount, as of September 2020.

  • BMW i3s: $7,500
  • Ford Fusion Energi (2013–2018): $4,007
  • Honda Clarity: $7,500
  • Hyundai Kona: $7,500
  • Nissan Leaf: $7,500
  • Toyota Prius Prime: $4,502
  • Toyota Rav4 Prime: $7,500

Additional electric car incentives

Depending on where you live, your state, city or even your utility company may offer additional electric car incentives. Look for additional tax credits, rebates or vouchers, discounts on vehicle registration fees, and other special offers or exemptions.

For example, in Colorado, electric vehicles are exempt from state motor vehicle emissions inspections. In California, some utility companies offer rebates on the purchase of electric vehicle supply equipment, or EVSE, such as a charging station. And California’s Clean Vehicle Rebate Project gives residents up to $7,000 when they buy or lease an eligible zero-emission or plug-in hybrid vehicle.

Visit the U.S. Department of Energy Alternative Fuels Data Center to check for incentives available in your area.

What’s next?

If you’re planning to buy a plug-in electric vehicle, it pays to research the financial incentives that may be available before heading to the dealership. This federal tax credit, along with any state incentives, could significantly offset the often-higher price of an electric vehicle. You may find that buying a new EV with the federal tax incentive would cost you less than buying a used model.

If you’re confused about how the federal electric vehicle tax credit works, be sure to consult a tax professional.

About the author: Sarah Archambault is a freelance writer based in New England. She enjoys learning new ways to spend money wisely and helping others figure out how to make smart financial decisions. Sarah is a graduate of the Newhouse… Read more.