US electric car tax credits: How it works and what you need to know

Shifting from gasoline power to electricity is a big deal for many drivers. Especially as the charging infrastructure is still being built and, generally speaking, electric cars cannot go as far as their internal combustion cousins.

But the change will have a positive environmental impact, so it is in a country's interest to convince drivers to make the switch from gas to electricity. To help convince them, a vehicle tax credit comes into play, lowering the cost of buying a new electric car, thanks to a government-issued tax credit.

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Different countries offer different tax credit, so we're going to stick with the US in this article and look at the federal EV tax credit system.

This may sound simple - the cost of buying a new electric car is reduced by the government - but in reality it is a little more complicated. For a start, some car makers advertise their electric vehicles (EV) with the credit included in the price, while others show the list price before the reduction has been applied.

Further confusing the issue is how there is a limit imposed on the credit. This limit is based on the number of electric vehicles each manufacturers sells in the US in total. Once a manufacturer sells more than 200,000 qualifying vehicles, the tax credit on new EVs it sells is cut in half for six months. It is then halved again for six months, then reduced to zero.

The amount of credit you receive also depends on the size of the vehicle's battery, and the size of your tax bill for the year you buy the car.

Here is everything you need to know about federal electric vehicle tax credits in the US:

How much is the federal credit?

The maximum tax credit available is $7,500, which is taken off your personal tax bill for the year in which you buy the vehicle. However, this is a tax credit instead of a cash rebate, so your tax bill will only fall by this amount if you owe at least $7,500 in tax for the year.

If your annual tax bill for the year is less - $4,000, say - then the federal credit will fall to that amount. It is also worth noting that the remaining $3,500 of tax credit cannot be applied to the following year's taxes - it is a one-time thing.

Also, this only applies if you buy the car outright. If you lease it then the tax credit goes to the manufacturer or dealership; it is then up to them to factor that into your monthly lease bill. Most do this, but they are under no obligation to do so.

You must also be aware that the tax credit cannot be earned if you purchased the vehicle with the purpose of selling it. This is difficult to prove either way, as we all think about resale value when buying a new car, but it is a rule designed to stop someone earning the tax credit by buying then quickly selling an EV It also means car dealers cannot earn the credit and put it against their personal tax bill.

Can the federal credit be passed to the next owner?

No. This means if you buy an EV from a dealer which has used it as a demonstration car - and is therefore the first registered owner - you cannot apply for any tax credit as you are not the first owner. This even applies if the dealership did not apply for the tax credit themselves.

Which cars qualify for federal tax credits?

The tax credit applies to most electrified vehicles - that means vehicles which are fully electric, but also those which are plug-in hybrids.

Hybrids which charge their own battery and cannot be plugged in do not qualify for any tax credit.

However, it is not a flat rate. Not only does the amount of credit vary depending on your tax bill, but it also varies depending on the size of the vehicle's battery pack, and how many EVs the manufacturer has sold in the US since the start of 2010.

Most all-electric cars - even small ones like the Fiat 500E and Chevrolet Bolt - qualify for the full $7,500 credit, but many hybrids do not, owing to their smaller battery and the fact they are less environmentally-friendly. The hybrid BMW i8, for example, receives a maximum credit of $3,793, and the Mini Countryman SE hybrid qualifies for up to $4,001

A full list of qualifying vehicles, including the size of the maximum federal tax credit available from each, can be viewed on the IRS website.

The amount of total available credit is worked out by awarding an initial $2,500 to any vehicle which draws power for propulsion from a battery pack of at least 5 kilowatt hours in size. The credit is then increased by $417 for each additional kilowatt hour, but is capped at a limit of $7,500.

The credit can be applied to the purchase of any qualifying electric car made after December 31, 2009.

Will the current EV tax credit system end?

Yes. As we mentioned earlier, the current system is only valid for manufacturers who have sold fewer than 200,000 qualifying vehicles in the United States. Tesla was the first to reach this threshold, having sold its 200,001st car in the summer of 2018.

This means that, as of January 1 2019, the amount of federal tax credit available to buyers of new Teslas was cut in half to (up to) $3,500. Then, from June 1, 2019 it was cut in half again to $1,750. It will remain at this level until the end of the year, and from January 1 2020, newly bought Teslas will not qualify for any federal tax credit.

Chevrolet is also in this situation, but a little further behind. Qualifying EVs bought from Chevrolet came with a $7,500 credit until the end of March 2019. This will now stand at $3,500 until the end of September, then will be cut to $1,750 until the end of March 2020, at which point it will be reduced to zero.

All other manufacturers of qualifying electric and hybrid vehicles will follow this trajectory once they pass the 200,000 sales barrier. Naturally, some will reach that number far quicker than others.

Are there further incentives and tax breaks on offer?

Yes. So far we have only covered federal tax credit, but individual states also offer their own incentives, which are applied on top of the federal tax credit.

For example California, where EV sales are particularly high, offers a $2,500 cash rebate when you buy or lease certain electric cars. When added to the federal tax credit, this can cut the total expense of buying the car by up to $10,000, with a quarter of this awarded as a cash rebate right after purchase, and the rest deducted from your tax bill for the year.

How to claim for your EV federal tax credit

You will need to fill out IRS form 8936, and if the car was purchased for personal use you can report the credit on your 1040 when filing your annual federal taxes.