Electric Vehicles (EVs) and Plug-in Hybrids (PHEVs) have come along, bringing the promise of helping motorists significantly reduce their impact on the environment. The incentive of saving a ton of money in long-term fuel costs appeared to be enough for many consumers to consider opting for EVs instead of internal combustion vehicles.

However, the high initial cost of purchasing greener alternatives deterred many would-be vehicle owners from purchasing them. The federal government decided to take matters into its hands by incentivizing everyone who purchases EVs. 2010 saw the federal government implement a program to encourage more EV sales. The federal EV tax credit offers up to $7,500 in tax credit to all consumers who purchased EVs.

Some auto manufacturers’ EVs have already been phased out of the federal program because tax credits have decreased based on the company’s total EV sales starting from 2010. However, more auto manufacturers are producing new EV models that qualify for the federal EV tax credit.

The question is: How does the electric vehicle tax credit work?

It is always good to do your research before deciding whether to invest money in an EV. Knowing how the EV tax credit works, what incentives you qualify for, how much you can get back, and how you can apply for different tax credits will go a long way in helping you make well-informed decisions.

This post will be your guide on everything you need to know about how the electric vehicle tax credit works.

What Are Electric Vehicle Tax Credits?

EV tax credits are non-refundable tax credits you qualify for by purchasing a vehicle with a battery-powered propulsion system. These EV tax credits are available for purely electric vehicles and plug-in hybrids. The amount of tax credit an individual can receive for purchasing a qualifying EV depends on various factors.

It is a non-refundable tax credit. It means that it can reduce your taxable income for a given year, allowing you to significantly reduce your tax bill. Suppose you purchased a vehicle that makes you eligible for a complete $7,500 tax credit, and your tax bill for that year amounted to $9,500. In that case, your tax bills will be reduced to $2,000 in taxes due to the tax incentive for purchasing an EV.

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How Much Can You Get Back In EV Tax Credits?

The amount in tax benefits electric vehicles qualify for can depend on several factors. The size of the power source used by the particular model is a significant factor in determining the tax credit. If you purchase an EV or a plug-in hybrid, each qualifying car starts with a base tax incentive of $2,500. Beyond that, the federal EV tax credit increases by $417 for each 5 kWh of battery capacity, up to a maximum tax benefit of $7,500.

The government’s tax credit for EV sales begins to decrease the tax incentives once an automaker sells 200,000 units of vehicles eligible for the rebate. After an auto manufacturer sells 200,000 units of qualifying EVs, the government reduces the tax benefit to 50% for two quarters. The following couple of quarters will see the benefit reduce to 25%, and at that point, any more EVs made by the manufacturer do not qualify for the tax credit.

Qualification Requirements Vehicles Need To Meet For The EV Tax Credit?

You need to know which vehicles qualify if you want to learn about how the electric vehicle tax credit works. All battery-powered vehicles and plug-in hybrids qualify for the tax rebate. Regular hybrid vehicles do not count because they do not fall under the criteria set by the government for the tax incentive. Some of the requirements defined by the Internal Revenue Service for EVs and PHEVs eligible for the tax benefit include:

• The vehicle must draw energy from propulsion energy from a battery with at least 5 kWh capacity;
• The vehicle must have been acquired after December 31, 2009;
• The vehicle must be acquired for use or lease and not for resale;
• The original use of the vehicle must begin with the taxpayer, and it should be used primarily in the US.

General Motors and Tesla are the two automakers that have successfully phased out of the program. Any EVs you purchase from these two carmakers no longer qualify you for the tax rebate. Fortunately, there are plenty of automakers who have yet to be phased out of the federal tax rebate program.

The US Environmental Protection Agency maintains a list of all vehicles that qualify for the federal EV tax credit. The list can help you narrow down your options if you are searching for EVs that can save you money through the tax rebate. It is an extensive list that will be updated in the middle of the year as more new EVs and PHEVs are released by manufacturers.

How Do You Receive The Tax Credit?

You can begin the process to receive the tax credit once you purchase a vehicle that qualifies. The entire process is fairly simple. Once you own a qualifying vehicle, you need to file Form 8936, along with your Form 1040 when you are filing your tax returns.

The federal EV tax credit is not like a refundable tax credit. The tax rebate only applies to the taxes you owe in a given year. With refundable tax credits, the government gives you a check if you receive tax credits for a higher amount than the taxes you owe for that year. However, the government will not give you a check for any excess tax credit, nor will the tax rebate roll over to your tax returns for the next year.

Remember that if you lease the vehicle instead of purchasing it, the manufacturer will be eligible for the tax rebate, and they will receive it. Fortunately, most manufacturers tend to factor the tax credit into the lease price, allowing their customers to indirectly benefit from the tax credit.

Final Thoughts

The current federal EV tax credit program is generous and makes it easier for many consumers to transition to an EV or PHEV. If you are relying on capitalizing on the tax benefit, we suggest you act now and get a model.

It remains to be seen whether the prices will come down as more automakers launch new EV models. Until such a day comes, capitalizing on the EV tax credit is your best bet to bring down the cost of buying an EV. We hope you found this guide on how the electric vehicle tax credit works helpful. Keep checking in for more EV blogs!