How EV Federal Tax Credits Work
When you buy a qualifying EV, you might be eligible to apply for a federal tax credit. To qualify, your vehicle and specific situation must meet certain criteria set by the federal government. If you do qualify, tax credits basically work like this: When you file your taxes, you can take a specific dollar amount off the amount of taxes that you owe. The maximum EV tax credit is $7,500, so if you buy a qualifying EV and owe $7,500 in federal taxes, you likely wouldn’t have to pay any federal taxes at all. If you buy a qualifying vehicle and owe more, however, like $10,000 in taxes, you would subtract the credit and owe the difference. In this example, that’s $2,500. Since the federal EV incentive is a credit, and not a rebate or refund, it only applies to taxes that you actually owe. Always check with a tax professional to confirm your specific situation but, for example, if you buy a qualifying EV yet only owe $3,000 in federal taxes, the IRS isn’t likely to send you a check for the extra $4,500 difference between the maximum credit and the amount you owe. You also can’t carry that amount over as a credit for subsequent years. The credit is only available during the year in which you actually bought the vehicle, too. While the maximum EV federal tax credit is $7,500, not all vehicles will qualify for it because the amount of the available credit is based on the size of the battery in an EV and the manufacturer’s status. (The federal tax credit is eliminated after a manufacturer sells more than 200,000 qualifying vehicles.) Most pure EVs have large enough batteries to qualify for the full $7,500 tax credit, although plug-in hybrids are more likely to qualify for a smaller credit because they typically have smaller batteries. Typical EV credits range between $4,000 and $7,500. The U.S. Department of Energy maintains a list of available federal tax credits by make and model, but they recommend you consult an IRS professional or official IRS publications before filing for a credit.
State Tax Credits and Incentives to Know
Some states also make EV ownership more affordable by offering direct rebate checks, credits on the installation of charging equipment, and cheaper electricity rates for charging EV batteries. Tax credits aren’t available for every EV, but you can save a lot of money if you know where to look. These programs are typically available in addition to federal tax credits. Some of these programs offer credits on state taxes, while others offer direct rebates. A few states don’t charge you sales tax when you purchase an EV. Unlike the federal incentive, which is a single program that offers a tax credit on new EV purchases based on battery size, some states offer multiple programs that each apply to different types of EVs and different types of buyers. A lot of state programs focus solely on businesses and government EV purchase but many are available to the general public. Some states also offer other types of incentives unrelated to purchase, like lower electricity rates when charging your EV during off hours, access to carpool lanes when driving alone, and access to free parking spots that aren’t available to ICE vehicles. Some states, like California, issue direct rebates instead of a tax credit. If you qualify for a rebate like California’s Clean Vehicle Rebate, for instance, you can submit proof of purchase and receive a rebate check issued by the program. These programs are usually available in addition to, and not instead of, the federal tax credit.
What About Used EVs? Do They Qualify for Tax Credits?
It all depends on the type of credit involved. Federal tax credits are only available when purchasing new EVs, as they are specifically limited to the original buyer of a qualified vehicle. That means you can’t buy a used EV and receive the federal tax credit. Federal credits generally aren’t available when leasing an EV either, as the credit is granted to the legal owner of the vehicle and that’s usually the manufacturer. That savings is frequently passed on to you when leasing an EV, but you can’t actually claim the credit yourself. State tax credit programs aren’t uniform and don’t have to conform to the federal program, so there are potential opportunities for some sort of tax credit or incentive with used EVs. While most state EV incentives are aimed at new vehicle purchases (just like the federal program), it’s still worth checking to see if you do qualify for some sort of break when buying a used EV. For instance, some states don’t charge sales tax on EVs, and that is sometimes extended to used EVs. State programs that provide rebates and credits for installing charging stations are also available regardless of whether you bought a new or used EV, and programs that provide lower electricity rates when charging your vehicle during off hours are also available to every EV owner or lessee.
State EV Incentives
With that in mind, EV federal tax credits only apply to the first 200,000 electric vehicles sold by each manufacturer. After a manufacturer has sold 200,000 qualifying vehicles, you can no longer receive a tax credit when purchasing a vehicle made by that manufacturer. If the federal tax credit is important to you, shop a variety of manufacturers to be sure the EV you purchase will qualify. Even though some EVs don’t qualify for federal tax credits, your state might still have local credits, rebates, or incentives available for any manufacturer. For example, if your state offers lower electricity rates when charging an EV during off hours, that incentive is available regardless of the make and model of your vehicle. You might also be able to receive a state or local tax incentive when buying a vehicle from a manufacturer like Tesla or GM that no longer qualifies for federal incentives, so make sure to check into the local programs where you live.
