How Does the Electric Car Tax Credit Work?

There are many benefits to purchasing an electric vehicle. They’re easy to drive, require minimal maintenance and you won’t spend a cent on gas. Also, you may qualify for a Federal Income Tax Credit, which can be as much as $7,500. Especially on many of the more affordable EVs available today, some of which sticker for under $30,000, that is a substantial amount of money to get back. Navigating how the tax credit works can be confusing; to help in your search, we’ve broken down the basics so you can take full advantage.

How Much Is the EV Tax Credit?

Most importantly, the EV tax credit is applied to your personal federal income tax, not to the vehicle purchase price. The tax credit amount most often cited is $7,500 for fully electric vehicles. However, the actual amount depends on the vehicle’s total battery capacity and will range incrementally from a minimum of $2,500 to a maximum of $7,500.

When Is an Electric Car Eligible for the Federal Income Tax Credit?

There are a few rules that govern federal income tax credit eligibility. Eligible electric vehicles must:

• have been purchased after 2010
• have four wheels
• charge via an external source

More specifically, the credit applies to vehicles that are charged by plugging into an external source (a charger) and have battery packs with capacities of 4 kilowatt-hours or higher. (Non-plug-in hybrid cars do not count, for example, since they technically charge themselves.)

The base EV tax credit is $2,500. Additional credits of $417 per kWh apply to vehicles whose battery capacities are above 4 kWh, for a maximum additional benefit of $5,000 and a total potential credit of $7,500. For example, purchasing an EV with a 7 kWh battery will qualify you for the minimum credit of $2,500 plus about $1,200 in additional credit (three kWh x $417) for a total credit of about $3,700.

Are There Any Exceptions?

Unfortunately, the federal tax credit does not apply to EVs that are leased – at least not for consumers. Leased EV federal tax credits go to the manufacturer, which is something to keep in mind when negotiating a lease. When negotiating, ask if the credit can be taken out of your monthly payments.

Also, note that the EV tax credits available are capped at 200,000 per manufacturer. If any one company sells a total of 200,000 or more electric vehicles, no more of that manufacturer’s products will qualify for the credit. This means that both Tesla and GM vehicles are completely ineligible for any credits since both companies have separately sold a total of 200,000 EVs.

How Does This Tax Credit Work?

The tax credit is not a cash rebate or refund, but instead reduces the amount of federal taxes you owe in the year you purchase the EV. It should be noted that if you do not have a tax liability the year you purchase the vehicle, you will not get the credit in another format. For example, if you buy an EV eligible for the full $7,500 but owe only $6,000 of taxes that year, you will receive a tax break for $6,000 only.

That said, different states have different initiatives, so do your research for specific details.

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