What Are Tax Credits for Electric Vehicles?

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Driving an electric car is not only good for the environment, but also for your wallet! Did you know that driving an electric car costs around half as much as a gas-powered vehicle?

Are you unsure which electric cars (EVs) qualify for tax credits from the federal government? You’re not the only one who feels confused. Here’s our guide on EV and plug-in electric vehicle tax credits to help you understand the requirements. It provides answers to some of the most important questions you could have concerning these incentives.

How Does it Work?

Before we dive deeper into which cars qualify for tax credits, we will first explain how tax credits work for electric vehicles. The concept is straightforward in theory: according to the US Department of Energy, “all electric and plug-in hybrid vehicles purchased new in or after 2010 may be eligible for a federal income tax credit of up to $7,500.”

That said, you can’t just run out and buy an electric car and expect the government to cut your taxes by $7,500 in April. In fact, the amount you are eligible for is determined by your income tax and the size of the electric battery in your vehicle.

Individual tax credits are calculated by the government depending on your federal income tax and car, but it’s important to read the small print. To begin, keep in mind that these federal tax credits do not last indefinitely, and they may have already passed you by for your vehicle. Sales of electric vehicles are pushing certain manufacturers over the predefined barrier of qualifying sales as demand grows. Another rule to remember is that the federal tax credit cannot be transferred. Only the original registered owner is eligible for this credit. That means any secondhand electric vehicles you own or plan to buy are already excluded. Any lease on an electric car is subject to the same conditions. In this situation, the tax credit is given to the manufacturer who is providing you with the lease.

How Much is the Credit?

A credit is frequently described as being worth “up to” a certain amount. The modifier “up to” is crucial. The federal incentive is sometimes referred to as a flat $7,500 credit, but it is only worth $7,500 to someone who owes $7,500 or more in taxes at the end of the year. Let’s imagine you buy a qualifying electric vehicle and owe $5,000 in taxes for the year. The tax credit will be limited to that. There will not be a refund cheque for the remaining $2,500. A portion of the credit that is not utilised cannot be applied to the following year’s taxes. Another factor that plays a big role in how much the credit will be is the battery size. A hybrid car will get less credit than a full electric car. In short, these are the criteria a vehicle must meet:

  • It is purchased brand new from a factory.
  • Mostly used in the United States.
  • Regardless of battery size, it is charged via an external source.
  • You bought it in 2010 or later

The Future?

President Joe Biden suggested the Build Back Better Plan, often known as the Build Back Better Agenda, ahead of his inauguration. It comprises money for COVID-19 assistance, social services, welfare, and infrastructure, as well as cash dedicated to mitigating climate change’s effects.

The plan was broken down into three sections. Electric automobiles were one of those components. The Build Back Better Act would make used cars eligible for a tax credit, with buyers of used electric or plug-in hybrid vehicles receiving up to $4,000 in savings. (The credit can be applied for by either the buyer or the seller of the used car.) The plan also includes a $7,500 credit for electric motorbikes or three-wheeled vehicles, or half the cost of the vehicle. Fuel-cell vehicles are also eligible for a tax credit. Besides that, consumers shouldn’t be concerned about the final figures because carmakers would most likely price their vehicles to meet the requirements.

Only a small percentage of electric automobiles on the market now would be eligible for a full credit. However, we know that many more electric vehicles will be produced and marketed in the next years. We’re on the verge of something big happening. President Biden has stated that within a decade, half of all new cars sold in the United States will be electric. For now, many details are still being negotiated.