Get a Tax Break on a New Electric Vehicle

Are you in the market for a new vehicle? If you jump on the electric vehicle bandwagon, you might be eligible for a sizable federal income tax credit. However, not every electric vehicle qualifies for the credit. And the tax break is being phased out, or is already phased out, for certain models. Here’s what you should know before you complete the sales paperwork on a new electric vehicle.

The Basics

The federal tax credit for electric vehicles, including plug-in hybrids, is equal to the sum of:

• $2,500, and
• $417 for a vehicle that draws propulsion energy from a battery with not less than five kilowatt hours of capacity, plus $417 for each kilowatt hour of capacity in excess of 5 kilowatt hours, up to $5,000.

Therefore, the maximum electric vehicle credit is $7,500, regardless of the vehicle’s weight or price. In other words, you can get the same $7,500 credit for a 2021 Hyundai Ioniq as for a 2021 Porsche Taycan. The IRS has posted the credit amounts for qualifying vehicles on its website. (See “IRS List of Qualified Electric Plug-In Vehicles” below.)

Important: Certain states also offer financial incentives — such as tax credits, rebates or other discounts — for buying an electric vehicle.

Eligibility Requirements

To qualify for the credit, the electric vehicle must meet the following requirements:

• It must have at least four wheels and be manufactured primarily for use on public streets, roads and highways, excluding a vehicle operated exclusively on a rail or rails. (For example, golf carts don’t qualify.)
• It needs to be treated as a motor vehicle for purposes of Title II of the Clean Air Act. This effectively bars certain low-speed motor vehicles from the credit.
• It must have a gross vehicle weight rating of less than 14,000 pounds.
• It needs to be propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of at least 4 kilowatt hours and is capable of being recharged from an external source of electricity.
• It must be used predominantly in the United States.

To be eligible for the credit, you must be the original user of the vehicle. Also, you must have acquired it for use and not for resale. In addition, leased electric vehicles aren’t eligible for the credit; the tax credit belongs to the title owner of the vehicle, not the lessee.

Mechanics of the Credit

A tax credit reduces your tax liability, dollar for dollar. This means that a vehicle that costs $30,000 and qualifies for a $7,500 credit will effectively set you back only $22,500 once you factor in the credit.

However, the credit isn’t part of the price you negotiate when you haggle with the sales manager at the dealership. In fact, dealership employees often aren’t particularly knowledgeable about this tax break.

In addition, the credit isn’t available at the time of purchase; you receive it when you file your income tax return for the tax year. For example, if you buy a qualified vehicle on April 1, 2021, you can claim the credit on the 2021 tax return you’ll be filing in 2022. So, you may have to wait a year to receive the tax benefit.

Last, the credit is nonrefundable. Therefore, if you owe $5,000 in tax and you buy an electric car qualifying for a $7,500 credit, your credit amount is only $5,000. Any leftover amount can’t be carried forward or back to previous tax years.

Phaseout Rules

The credit for electric vehicles is subject to a phaseout, based on the manufacturer. The credit begins to phase out for a manufacturer’s vehicles when it has sold at least 200,000 qualifying vehicles for domestic use.

In 2018, Tesla famously became the first manufacturer to cross the 200,000-vehicle threshold. General Motors followed later that same year. Credits for vehicles of those two manufacturers are no longer available.

Beyond Taxes

Electric plug-in vehicles are growing in popularity, especially in urban areas and for younger drivers. Indicative of this trend, General Motors recently announced that it expects to produce only electric vehicles by 2035 — less than 15 years from now.

But electric vehicles aren’t right for everyone. For example, people who like to venture out on long road trips may prefer a traditional gas-powered or hybrid vehicle as their primary mode of transportation. Currently, there are limits on how far electric vehicles can go before needing to be recharged and charging stations can be hard to find. Plus, there are some concerns about battery life and disposal as these vehicles age, as well as safety issues with batteries after electric vehicles have been damaged in accidents.

Bottom Line

Contact your tax professional to discuss the pros and cons, including any federal and state tax incentives, of buying an electric vehicle. If you decide to go the “green” route, he or she can help ensure you get the tax credit you deserve.