How Do Electric Car Tax Credits Work ?

Buying guide for electric vehicles How Do Electric Car Tax Credits Work? While the Biden administration’s proposal to include $100 billion in new EV subsidies is no longer part of the infrastructure bill passed by Congress those considering EVs due in part to the tax break shouldn’t panic .

how does the ev tax credit work

This latest spending plan is designed to expand current incentives and make manufacturers such as Tesla and General Motors that have used up their available points eligible for points again. The measure also slashed the maximum federal tax credit from $7,500 to $7,000.

How Do Electric Car Tax Credits Work
how does the ev tax credit work
How Do Electric Car Tax Credits Work

That said the current program is still in effect and there are a lot of details to consider if you’re going to take advantage of it. Here’s what you need to know.

Federal Tax Credit Worth $7,500

The most important government incentive you’ve probably heard about is a federal tax credit of up to $7,500 for certain alternative energy vehicles. This can reduce the cost of a more fuel-efficient car but it doesn’t work in all situations. Tax credit passed in 2009 The act still applies to 2010 and newer plug-in electric vehicles. Here’s how it works:

You won’t get an immediate tax credit

First the bad news: You have to give the money to the government as part of the purchase deal.

Tax credits are just that — tax credits. Manufacturers often advertise it as a discount on the price of the car but that’s not the case. Instead it’s a government policy that allows you to claim a credit of up to $7,500 in federal income tax for the year of purchase car. In other words it reduces your tax liability. If you are eligible for a refund you will receive any credit beyond that.

Buyers still have to pay the car price they negotiated (whether in cash or discounted to the loan amount). They can then claim the credit on their next tax return. This credit reduces your tax liability. If your tax bill falls below the credit you will receive The balance is refunded. However you cannot carry over that credit or any balance to the next tax year.

It Applies Only to New Car Sales

There is no tax credit for buying a used electric vehicle regardless of efficiency.

it does not apply to rental vehicles

If you lease a new electric vehicle the tax credit goes to the manufacturer that gave you the lease. They may choose to use the line of credit to help lower your monthly payment. But they don’t need to. You can bring this up in negotiations.

Suitable for EV plug-in hybrid and fuel cell vehicles

By law the credit applies to road vehicles that are externally charged and have battery packs with a capacity of 4 kWh or more. The base credit is $2,500 $417 per kWh over 4 kWh and the full $7,500 credit does not exceed $5,000. The formula applies to All battery electric vehicles as well as plug-in hybrid vehicles.

In practice this is how the tax credit works. The standard 2021 Toyota Prius Hybrid is not eligible because it cannot be plugged into an external power source. But the 2021 Toyota Prius Prime will apply to the first $2,500 of credit due to its plug-in feature. because Its 8.8 kWh battery will be eligible for an additional $2,000 in credits. The 2021 Toyota RAV4 Prime plug-in hybrid has a larger 18.1 kWh battery and is eligible for the full $7500 credit.

The $7,500 credit also applies to hydrogen fuel cell vehicles such as the Toyota Mirai Honda Clarity or Hyundai Nexo. However these only make sense for buyers who live near one of the few U.S hydrogen refueling stations that are mostly concentrated in California.

The U.S Department of Energy maintains a list of vehicles eligible for tax credits and the amount buyers can deduct for them.

2022 jeep grand cherokee electric
2022 jeep grand cherokee electric

Some EVs are no longer eligible

Browsing through this list you may notice that some pure electric vehicles are not eligible. Why? They are victims of success. The first 200,000 cars produced by the manufacturer receive full credit. Beyond that the credit begins to sunset. it first gradually declines Dropped to half and then expired about a year after the 200,000th sale.

Right now both manufacturers have completely exhausted their available credits — you’re not eligible to buy any Tesla or GM vehicles regardless of efficiency.

Nissan is next to lose credit though as of this writing buyers of the 2021 Nissan Leaf are still eligible for the full amount.

State and local incentives where you live

While the federal government’s efforts account for the lion’s share of government EV discounts some state and local governments have created incentive programs to help new-car buyers afford something more efficient. These can be tax credits tax refunds reduced single-occupancy vehicle tax Carpool lane access stickers and waived registration or inspection fees.

California offers the most support for EV buyers. Through the state’s Clean Vehicle Rebate program residents can receive state incentives of up to $7,000.

Alaska Alabama and West Virginia are states that do not offer support to individual EV buyers. However they do offer some programs to offset the cost of companies pursuing more fuel-efficient fleets.

The Department of Energy maintains an interactive list of state-level incentives while Plug-In America publishes an interactive map of electric vehicle incentives.

Your Electric Utility May Help

2022 Honda Odyssey

Finally it’s not just the government that can help you cover the cost of a new electric car. Some local power companies have incentive programs to help buyers buy EVs (after all they’re one of the beneficiaries when you turn your fuel money into electricity bills).

These can be as important as rebates. For example the Omaha Public Power District offers customers a $2,500 discount on new electric vehicle and home charging stations. Or they could be as small as discounted electricity bills for charging EVs outside peak hours.

Should I Act Now or Wait?

The current federal program is generous and there are many affordable EVs coming to market from manufacturers that have a lot of these credit banks. If you’re looking to transition to an electric vehicle or plug-in hybrid you may want to act early.

But if you’ve made up your mind about Tesla or GM’s new Hummer EV or Cadillac Lyriq both of which are due next year it doesn’t hurt to wait and see if Congress comes up with another EV tax break.

how does the ev tax credit work
how does the ev tax credit work

Some of the proposals on hold would increase the manufacturer’s sunset total to 600,000 vehicles — enough to put GM and Tesla vehicles back in qualifying territory. The same proposal would create a $2,500 incentive for the purchase of a used electric vehicle.

Another part of the proposal would be to apply full credit at the point of sale. The change means buyers can see it as a discount on the price of the car rather than waiting until next tax season to treat it as a deduction.

While the percentage of EV sales growth has grown exponentially these vehicles make up about 4% of total sales. If manufacturers build more EVs than the market expects two things will happen. Prices will fall and there will be more federal subsidy pressure to boost Electric car sales. In either case you win.

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