Electric Vehicle Tax Credits: What You Need to Know

Is There Any Fine Print for EV Incentives?

Of course, there is. There’s the rule that limits the federal tax credit to the original buyer of a qualified EV or plug-in hybrid vehicle. You should also know about a few other conditions:

  • As noted earlier, if you’re leasing a vehicle, the credit stays with the manufacturer that’s offering the lease since it is the actual owner of the car. In most cases, however, the tax credit has been factored into the cost of the lease, so the customer benefits.

  • The federal tax credit isn’t applicable to an electric vehicle being purchased for the purpose of reselling it. That’s a gray area, though, and would be tough for authorities to prove.

  • The vehicle must primarily be used in the United States.

  • Plug-in and battery electric vehicles must be built by qualified manufacturers to be eligible for the full $7,500 credit.

  • Plug-in hybrids and battery electric vehicles also must have battery packs that are rated for at least 4 kWh of energy storage and are capable of being recharged from an external source.

  • The IRS says that manufacturers are not required to certify to the agency that vehicles meet the requirements to qualify for the various credits. For vehicles not listed on the Department of Energy site or on the IRS list of qualified vehicles, a buyer can generally rely on the manufacturer’s representation that the vehicle is eligible. That statement can either be in writing or on the company’s website. The same thing goes for electric motorcycles, plug-in and EV conversions, three-wheel EVs and low-speed EVs.

  • The IRS, of course, always reserves the right to reject a claim for a tax credit.

Do Electric Vehicle Tax Credits Run Out?

Yes. The government is phasing out the electric vehicle tax credits as sales increase, on the theory that the high initial cost of adding new technology to a vehicle will come down as economies of scale improve with more sales. That’s supposed to eliminate the need for subsidies. The expiration date is separate for each manufacturer and only comes after an automaker sells 200,000 qualified vehicles. Tesla hit the milestone first in July 2018. As a result, there are no federal tax credits for Tesla now.

In the last quarter of 2018, GM became the second carmaker to sell 200,000 qualified plug-in vehicles. And like Tesla, all new electric vehicles from GM no longer have the federal tax incentive.

Nissan is next in line for a credit phaseout, but Edmunds analysts say that unless sales for the Leaf pick up significantly, it’s unlikely Nissan will reach the threshold in 2020. All other makers are trailing far behind in plug-in car sales.

Can Electric Vehicle Tax Credits Be Passed On?

This question occasionally pops up: Who gets to claim the tax credit in the case of low-mileage cars that dealerships sell after having used them as demonstrators or loaner cars?

The answer is pretty simple: EV tax credits cannot be passed on. Only the original registered owner of an eligible vehicle can claim the federal tax credit. Even if the original registered owner didn’t apply for the credit for some reason, it cannot be passed along to a subsequent buyer.

This information is useful to know because it can be a bargaining point in a used-car purchase negotiation. It might turn out that a new model with the tax credit is a better deal than a used one if the federal tax credit program means the list price for the new model is reduced by up to $7,500.

Are There Tax Credits From States or Other Sources?

Yes. While the federal tax credits for plug-in and natural gas vehicles get the most mention, there also are dozens of state and regional incentives on plug-in vehicles and those that use alternative fuels. Many states have a dozen or more programs. Many, however, apply only to businesses. Some credits come in the form of exemptions from fees and inspections. Others are nonmonetary incentives such as carpool lane access and free parking.

Retail buyers in a number of states can get some cost relief in the form of tax credits, rebates, or reduced vehicle taxes or registration fees for buying a qualified alternative-fuel or electric-drive vehicle.

In California, for example, people who buy or lease a new electric car can get a $2,000 cash rebate. That’s in addition to the federal tax credit, and it reduces the out-of-pocket cost of the car by close to $10,000. Plug-in hybrids are a little different. Because they have smaller batteries and burn gasoline part of the time, such cars are eligible for only $1,000 rebates under California’s clean vehicle rebate program.

Plug In America, an advocacy group, has an interactive U.S. map that shows current plug-in car incentives in each state. The U.S. Department of Energy also has an interactive chart of state incentives.

It’s a good idea to be sure about available state and local incentives before you shop. Just because a state had a program doesn’t mean it will continue indefinitely. California has changed its rebate program by taking income levels into consideration.

How About Fuel Cell Cars?

Hydrogen fuel cell electric vehicles do qualify for incentives in some states. In California, for example, there is a  $4,500 state rebate available, so check with your state’s incentive website to be certain.

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