How Does EV Tax Credit Work and Which Models Qualify?
Since 2010, the federal government has offered up to $7,500 in tax credits to electric vehicle buyers. The EV tax credit brings down the price of fuel-efficient cars closer to what buyers pay for internal combustion vehicles. But, how does EV Tax credit work?
This article will help you understand how the EV tax credit works, how you can benefit, and the qualifications you must meet. We will also go deeper to help you find an electric car that qualifies for the program.
How Does EV Tax Credit Work?
When you purchase a battery electric vehicle or a plug-in hybrid electric vehicle that qualifies for the program, you get a credit of between $2,500 and $7,500 on your federal taxes. The credits you may earn depend on several factors, and you can only use them to decrease the taxes you owe in the given year. For example, if you purchase an EV car and earn $7,500 in credits and your total federal taxes for the year add up to $9,000, you will owe the government $1,500.
The tax incentives you may qualify for vary depending on your car’s battery size, among other factors. All qualifying vehicles get a base incentive of $2,500, which then increases by $417 credits for every 5 kWh of battery capacity up to a maximum of $7,500 tax credits. For an EV with a 10 kWh battery, the tax credit would be $2500 (base credit) + $417 (initial 5 kWh) + ($417x5) (additional battery capacity) = $5,002.
Nonetheless, the federal government has put a cap of 200,000 units on manufacturers. Immediately the automaker hits the 200,000 qualifying car sales, the tax credit phase-out begins. The federal government reduces the tax credit by 50 percent for the first two quarters before reducing it to 25 percent for the next two quarters. The automaker no longer qualifies for the tax credit beyond that point. Tesla and General Motors no longer qualify for the tax credit initiative as they have hit the 200,000 car sales.
Which Vehicles Qualify for EV Tax Credit Works?
All plug-in hybrid vehicles and battery electric cars qualify for the tax credit, but the regular hybrid models are not eligible. For a car to qualify, it will need to meet the weight requirements of not weighing more than 14000 pounds. It should also have a battery larger than 5 kWh that you can charge externally. The electric two-wheelers may qualify if they can hit 45 mph and use an electric motor with a battery of at least 2.5-kilowatt-hours, rechargeable externally. The tax credit for two-wheelers is 10 percent of the price with a maximum credit of $2,500.
How to Receive the Tax Credits?
Getting the tax credit is not complicated. You need to buy a car that qualifies for the credit and then fill out form 8936 together with your tax returns. The credit will only apply to your taxes in a year. The EV tax credit is non-refundable, which means you will not get the difference if the tax you owe the government is less than the credit. You will also not be able to roll over the credits. If you get a $4,500 tax credit after buying a car, but you owe the government $3,000 in taxes, the credit will cover your taxes in full.
Furthermore, you will not receive a tax credit if you lease an electric car. You must be the owner of the vehicle to qualify for the credits. Nonetheless, the leasing company may include the tax credit to lower your monthly lease payments, thus benefiting indirectly.
EV Tax Credit The Ultimate Guidelines
Before you purchase an electric vehicle, you may need to understand how does EV tax credit work and the rules and requirements for a car to qualify for the tax credit. The guidelines you should keep in mind include:
- A home-built or a kit unit cannot qualify. The car must be new and from the manufacturer.
- Only plug-in electric models qualify. The vehicle should have an electric motor and a battery with at least 4 kWh. It should also recharge externally.
- The maximum gross weight rating for a car to meet the criteria is 14,000 pounds.
- The car purchase should not be for a resale purpose.
- The unit will only qualify for tax credit once.
- The tax credit is non-transferable, and only the original purchaser can claim the incentive.
- It applies to cars primarily driven in the United States.
Nonetheless, you can benefit from the federal tax even without purchasing the unit. In this case, you will have to lease from the dealer or the manufacturer who uses the incentive to reduce your monthly repayments.
Are There Tax Incentives from States?
Yes. Some state-run tax incentive programs that work together with the federal incentive, allowing you to make up to $10,000 in savings. The benefits of state-sponsored programs vary, with some offering instant rebates to the dealership, discounts on sales tax and registration, and free or discounted parking, among others. In California, the EV state tax credit has a price cap of $60,000. New EV car buyers get up to $2000 rebates, making it possible to save up to $9,000 on your car.
Tracking Tax Credit Phase Out by Brands
Tesla and General Motors have exceeded the 200,000 car sales cap, meaning they no longer qualify for the $7,500 tax rebate. Nonetheless, those looking to buy Tesla and General Motors units should look out for attractive discounts by the automakers to make up for the phased-out credit. As of Dec 31, 2021, Tesla’s total sales of 1,090,134 surpass the 200,000 mark by 890,134 units, making it the most successful EV automaker. General Motors is a distant second with 271,718 sales, surpassing the credit cap by 71,718.
Tesla hit the 200,000 mark in July 2018. The automaker’s success comes from selling a mix of the original Tesla Roadsters and the successful Model S, X and 3 units. The maximum $7,500 tax credit on Tesla cars lasted until Dec 31, 2018. From that moment, customers would qualify for 50 percent, up to $3,750, before the incentive was reduced to $1,875 on July 1, 2019. Since January 2020, Tesla no longer qualifies for a tax credit. That said, Tesla buyers can access state, utility, and local incentives.
General Motors’ tax credit phase-out began at the end of 2018 when it reached the 200,000 units cap. The success of General Motors is in part due to its Chevrolet Spark EV, Cadillac CT6 PHEV, Chevy Bolt EV, Cadillac ELR, and Chevrolet Volt extended-range electric. GM has discontinued all these units except for the 2020 Chevrolet Bolt. Furthermore, the manufacturer offers lucrative cash-back incentives to make up for the phase-out of tax credits.
The automakers that are likely to hit the 200,000 units cap in the coming months based on sales data from Dec 31, 2021, include Toyota, Nissan, Ford, and BMW.
Despite Tesla and General Motors no longer being eligible to get the federal tax credit, electric car buyers still have a host of options to consider if they want to save with their new purchase. All other manufacturers are probably a few years from surpassing the 200,000 cap, with Toyota being the closest. Depending on the model you would like to buy, you can get tax credits of between $2,500 and $7,500. You may even combine federal tax credit with state and utility incentives to take your savings up to $10,000.