There are a number of reasons you may be interested in buying an all-electric or plug-in hybrid vehicle, but the most common is a that you want to help the environment. What you may not realize is that these cars can help your wallet, too—and in a few different ways.
According to the Office of Energy Efficiency and Renewable Energy, driving an electric-powered car costs about half as much on average as a gas-powered vehicle. Electric engines also have fewer parts to repair, cutting down on ongoing maintenance costs. Still, many consumers shy away from purchasing electric and plug-in hybrid cars due to the price tag.
As a result, leasing these vehicles has been a far more popular option than buying them. However, buying an electric vehicle (EV) outright has one big financial advantage over leasing: Purchasing an all-electric or plug-in hybrid vehicle can qualify you for a federal tax credit worth up to $7,500, as well as other incentives of various amounts.
The actual amount you’ll receive depends on a few factors, including the car you buy and your tax information. Receiving this credit shouldn’t be the only reason you purchase one of these vehicles. But if you’re shopping for an all-electric vehicle or want a plug-in hybrid and can’t decide between two similarly priced models, this credit could push one above the other.
What Is a Tax Credit?
To understand what you’ll get from this benefit, you’ll first need to understand what tax credits are. Tax credits reduce your tax liability on a dollar-for-dollar basis. In other words, credits can put actual money back in your pocket by decreasing the tax you owe the government.
For instance, let’s say you owe the government $3,000 after completing your taxes. If you qualify for a $7,500 tax credit, that money gets applied against your owed balance—knocking it down to $0. Depending on the type of tax credit, you may or may not receive the remaining $4,500 as cash after your balance is eliminated.
Most tax credits are “nonrefundable,” which means you don’t get any of the leftover cash after it’s applied to your balance. The credit for electric and plug-in hybrid vehicles is no exception. Remember this when calculating your potential savings: If you typically get a refund instead of owing taxes, this credit won’t help you.
Tax credits are different from tax deductions, which affect the amount of your taxable income. Unlike a tax credit, tax deductions don’t result in dollar-for-dollar savings. This makes credits typically more helpful than deductions, depending on your personal situation.
How Much Is It Worth?
While the credit is advertised as “up to $7,500,” the “up to” part matters just as much as the “$7,500” part in determining its actual value. Since the credit is nonrefundable, you’ll only see the full $7,500 if you end up owing $7,500 or more in taxes at the end of the same year you claim the credit. You can’t carry over any excess credit to the next tax year. You use it or lose it.
The credit amount also depends on the battery in your vehicle. The more powerful it is, the larger your credit is. The U.S. Department of Energy keeps a list of the credit amount for eligible vehicles.
Which Vehicles Qualify?
Only certain all-electric and plug-in hybrid cars qualify for this tax credit. To be eligible, a vehicle must be:
• Purchased in or after 2010.
• Purchased new from a factory as an electric vehicle.
• Used predominantly in the United States.
• Charged from an external source, regardless of its battery size.
Pre-owned vehicles do not qualify—only the original owner can receive the credit. If you lease the vehicle, the credit goes to its lessor, not you. They may factor the credit into your lease but aren’t required to. You can try negotiating this with them. Vehicles converted from gasoline to electricity are also ineligible.
In addition, cars do not stay eligible forever. Once a car manufacturer sells 200,000 all-electric and plug-in hybrid vehicles, the tax incentive begins to slowly phase out for its vehicles. Beginning in the second calendar quarter after a manufacturer hits that sales figure, the tax credit drops to 50 percent of its value (from $7,500 to $3,750, for instance). After another two quarters, it drops to 25 percent of the original value. Finally, at the start of the sixth quarter, the credit is no longer available.
Hybrid gas-electric cars used to be eligible for a different tax credit. However, this expired in 2010.
Are Other Incentives Available?
The federal tax credit for purchasing an all-electric or plug-in hybrid vehicle receives the most attention, but other incentives are available for these vehicles. At a federal level, you can claim as much as 30 percent of the cost of an electric vehicle charger installed in your home as a credit on your taxes. Some states offer incentives for installing this equipment as well.
Multiple states and regions also have separate programs for plug-in vehicles or alternative fuels. As many as 13 states offer some kind of cost savings for qualified alternative-fuel or electric-drive vehicles via tax credits, rebates, and reduced vehicle taxes or registration fees. Other non-monetary benefits also exist. For instance, your vehicle could entitle you to benefits like carpool-lane access and free parking.
Plug In America maintains a helpful interactive map of different states’ benefits.
How Do I Get My Credits?
To receive the tax credit for purchasing an all-electric or hybrid plug-in vehicle, complete IRS Form 8936 and include it with your return. If you add a refueling station to your property, you can claim that credit with IRS Form 8911. For individual state incentives and credits, check your state’s department of revenue website for specific instructions.