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How Do Electric Car Tax Credits Work? A Complete Guide

How Gas Prices Are Affecting the Electric Car Market

To attract more Americans to buy electric vehicles, which are not only fuel efficient but also eco friendly,  the federal government launched a program providing tax credits of up to $7500 to electric vehicle purchasers in 2010. Through that EVs became lower than that of the usual internal-combustion vehicles. Several states also joined in with their very own tax breaks. So how do electric car tax credits work? Let us talk more about it in this article.

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Before discussing in detail how do electric car tax credits work, let us first dive into the meaning of EV (Electronic Vehicle) Tax Credit. When you buy a vehicle with a battery propulsion system, which has the ability to get power from an external power you can avail of the non-refundable tax credits. Whether you have decided to buy new pure electric vehicles or new plug in hybrids, this is available for you. Regular hybrid vehicles and used electric vehicles, however, don’t qualify for this tax credit.


A variety of factors are used to measure the credits to be earned, which will be deducted to the taxes you owe in a year. For instance, if you bought an EV eligible for a $7500 tax credit and your total federal taxes for the year came to $8000, you would owe only $500 to the government.

How Do Electric Car Tax Credits Work: The Vehicles That Qualify


How do electric car tax credits work when it comes to knowing which vehicle qualifies. The vehicle qualifies for the credits if it meets several requirements, including a curb weight of less than 14,000 pounds, a battery larger than 5 kWh, and the ability to be recharged externally, among others.


The amount of credits, or tax breaks, that any car can qualify for is determined by the size of the battery in the vehicle. Every vehicle that qualifies receives a $2500 base incentive, plus an additional $417 in credits for every 5 kWh of battery capacity. Tax credits of up to $7500 are available for vehicles. To make things clear, the key modifier is “up to.” The federal incentive is commonly referred to as a flat $7,500 credit, but it is only worth $7,500 to someone who has a tax bill of $7,500 or more at the end of the year.


Also, once a car manufacturer sells 200,000 units that qualify for the rebate—which can be a mix of models—the phase-out period begins. The available tax credit is reduced by 50% for the first two quarters, then by 25% for the next two quarters. At that point, the automaker's vehicles are no longer eligible.

General Motors and Tesla have both been phased out of the program. Their vehicles are no longer eligible for tax breaks. Once an automaker reaches the phase-out portion of the program, the EPA maintains a running list of vehicles that qualify, the amount they qualify for, and the dates by which the vehicles must be purchased to qualify for the credits.


In summary these are the vehicles that qualify:


  • The vehicle was purchased new.
  • It has a top speed of 45 miles per hour or higher
  • It is propelled by an electric motor
  • The battery has a minimum capacity of 2.5 kilowatt hours
  • It can be charged externally
  • It weighs less than 14,000 pounds.


The loan for two-wheeled vehicles can be declared for 10% of the vehicle's purchase price, up to a limit of $2,500.

How Do Electric Car Tax Credits Work? The Process


So how do electric car tax credits work? The procedure is fairly straightforward. Of course, you must first purchase a vehicle that qualifies. Then, along with your tax return, you complete form 8936. It is important to note that these are non-refundable tax credits, not refundable tax credits. That is, the credits can only be applied to the taxes you owe in a given year, and if you received more credits than you owe in taxes, you will not receive a check for the difference. (You would receive that check if you had refundable tax credits.) Furthermore, because the credits do not roll over, you can only apply them to your taxes for one tax year.


Bear in mind that if you lease the vehicle, you will not be eligible for the credits because you do not own it and the manufacturer will receive the credit. And then the credit is frequently factored into the lease price, so you benefit indirectly. Tax credits vary from state to state, and in some cases from county to county or city to city. Plug In America keeps track of where credits are available across the country.


In addition, as part of the purchase agreement, you must advance the funds to the government. The tax credit is precisely that: a tax credit. Manufacturers frequently advertise it as a price reduction, but it is not. Instead, it's a government policy that allows you to deduct up to $7,500 from your federal income taxes in the year you buy the car. In other words, it lowers your tax bill. If you are eligible for a refund, you will also receive the amount of your credit.


Purchasers still must pay the agreed-upon price for the vehicle (whether paying it in cash or folding it into the loan amount). They can then claim the credit when they file their taxes the following year. This credit reduces your tax liability. If your tax bill is less than the credit, you will receive a refund for the difference. However, you cannot carry over that credit or any remaining balance to the following tax year.


Is there a tax credit for electric cars in 2020?


If you bought an electric or alternative vehicle in 2020, you may be able to claim a credit on your 2020 tax return. If you purchased it in a previous year and owed taxes, you may be able to amend your tax return to claim the credit. This credit is not refundable and can only be used to offset your tax liability for a single tax year. The Qualified Plug-In Electric Drive Motor Vehicle Credit is nonrefundable and can be worth up to $7,500.


So how do electric car tax credits work? When you use eFile.com to prepare and e-File your 2020 Tax Return, you won't have to worry about which of the credits listed above you qualify to claim on your tax return. Simply answer a few questions, and the eFile app will select the appropriate tax credit form(s) for you to fill out. In addition, the app will calculate and enter your credit amount on your return.


You may be eligible for a tax credit if you purchase a new, qualified plug-in electric drive motor vehicle. Most electric vehicles qualify for the credit in general, but there are some restrictions. This is a vehicle that, according to IRS Section 30D, weighs less than 14,000 pounds, is powered primarily by an electric motor, draws power from a battery with a capacity of at least 4 kilowatt hours, and can be recharged from an external source of electricity.


The electric vehicle tax credits as sales increased were phased out, on the theory that the high initial cost of adding new technology to a vehicle would decrease as economies of scale improved with increased sales. Subsidies were supposed to be eliminated as a result of this. The expiration date varies by manufacturer and occurs only after an automaker sells 200,000 qualified vehicles. Tesla was the first to reach the milestone in July 2018. As a result, Tesla no longer qualifies for federal tax credits.


GM became the second automaker to sell 200,000 qualified plug-in vehicles in the fourth quarter of 2018. And, like Tesla, all new GM electric vehicles no longer qualify for the federal tax credit. Nissan is the next in line for a credit phaseout, but Edmunds analysts believe that unless Leaf sales increase significantly, Nissan will not reach the threshold in 2021. In terms of plug-in car sales, all other manufacturers are far behind.


What are the tax benefits of an electric car?


The tax benefits for electric cars are more than just tax credits. The transportation section of the bill does more than just increase the tax credit available to many plug-in vehicle buyers. It would repeal the current vehicle sales cap, which has denied Tesla and General Motors eligibility and is about to deprive Nissan of it as well.


Currently, as mentioned earlier, once an automaker has sold 200,000 qualified vehicles in the United States, its EVs and plug-in hybrids are no longer eligible. The new measure would extend eligibility until the year in which 50 percent of all new vehicles sold in the United States were qualified EVs or plug-in hybrids. It is expected that this will take a decade or more. Then there would be a three-year transition period.


After the sales cap was reached, the full rebate would still be available in the first year, a 75% credit would be available in the second year, and a 50% credit would apply in the third year, with no tax credit availability after that.


The EV rebate proposal is estimated to cost $31.6 billion over the next ten years by the Congressional Budget Office. That is only a small portion of the total cost of the Clean Energy Plan, which is estimated to be $259 billion. The biggest news for EV buyers may not be the increased tax credits, but rather that the measure converts the credit into a refund for eligible vehicles purchased by Jan. 1, 2022.


Numerous EV advocates would rather have the credit converted to a direct rebate. And that rebate can be used as part of a down payment right away, which would lower the initial cost of purchasing an EV or PHEV. It is unclear whether there is support in the Senate for such a change.


One key restriction that the new measure would not change is the restriction on participation to buyers. The bill retains language that allows the tax credit to be claimed only by the original registered owner. Consumers who lease and want to take advantage of the federal incentive must find a leasing company willing to share a portion of the credit. The owner is usually the leasing agency for leased vehicles. Most of them apply all or part of the credit to help lower the cost of the lease, although that is not required.


The criterion not only caps the retail price of qualifying vehicles at $80,000, but it also limits the total amount that any buyer can claim to 30% of the vehicle's value. The maximum tax credit for a new EV or plug-in hybrid with a $30,000 sticker price, for example, would be $9,000 even if the vehicle was built by union members in a factory in the United States.


So how do electric car tax credits work with this? The $8,000 federal tax credit for purchasers of fuel-cell electric vehicles, also known as hydrogen fuel-cell vehicles, and the credit for home EV charging equipment, which remains at 30% of the cost of purchasing and installing a home charger, up to a maximum of $1,000, remain unchanged in the new bill.



When all is said and done the tax credits can make buying an electronic vehicle worth it but you have to think about it carefully. To receive the full tax credit, you must earn enough money to have a tax bill of $7,500 or more, assuming your vehicle qualifies. Also EVs  are typically more expensive than comparable gas-powered vehicles and not only that  infrastructure is not as robust or widespread as that of fossil fuels, so you may not be able to stop and charge in every town if you go on a road trip.

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