As we head into 2020, electric (EV) and plug-in (PHEV) vehicles are getting more popular. However, owning and maintaining such vehicles is more expensive than a conventional gas-powered vehicle.
The government decided to make things easier for owners of these vehicles, as they can now drastically lower the upfront cost, thanks to the number of federal and state electric car tax credits. EV drivers can now fully enjoy fuel savings, as well as reduced emissions, which will make the environment much healthier.
It all sounds good but many EV owners and potential buyers are still confused about federal and state tax credits for electric cars. Which vehicles are eligible, how much is the credit, how does the electric car tax credit work?
These are only some of the question we’re going to answer in this article. For that reason, we suggest that you keep reading.
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Federal Tax Credits and Eco-Friendly Automobiles
The tax credit is here to help you save cash by reducing the income tax you owe to state and federal governments. In most cases, a tax credit is meant to reward and encourage the type of behavior that is beneficial to the environment, economy or any other factor that the government thinks is important.
How Does it Work?
The reason why tax credit is very useful is that it’s a dollar-per-dollar reduction of the income tax you owe. Let’s say you owe $1000 in federal taxes, eligible for a $1000 tax credit. In this case, your net liability will drop to zero.
Some types of credits, such as earned income credit, are refundable, which means that you’re still going to get the full amount of your credit, even if it goes above your tax bill. In that case, if a total tax is, for example, $500 and you have a $1000 earned income credit, you get a $500 refund.
How Do State Tax Credits Apply to Electric Cars?
As mentioned before, tax credits are here to encourage and reward the behaviors that are beneficial to your state. Driving an EV is certainly beneficial to your environment, as you reduce the emission from various types of fuels.
All PHEV and EV vehicles purchased in 2010 or after can be eligible for a federal income tax credit of a maximum of $7500. The amount of credit varies, depending on the battery capacity.
Furthermore, local or state incentives can also be in the game, meaning that the same vehicle isn’t going to be eligible for the same amount of credit in different states.
When it comes to the tax credit, you’ll often hear that it’s worth up to $7500 but that’s not always the case. The trick here is that only those with tax bill HIGHER than $7500 at the end of the year are eligible for $7500 tax credit.
For example, if you own a vehicle eligible for the tax credit and you owe $3500 in income tax for a particular year, your tax credit will be that amount – not above, not below. The unused part of the credit cannot be applied in the following year.
For those who lease an electric vehicle, the tax credit goes to the client that offers the lease, so you’ll not be able to take advantage of that. That client (manufacturer) can then count in the credit into the total cost, meaning that he can reduce your monthly payment. However, this isn’t always the case, as the manufacturer isn’t required to do that.
Finally, something we also mentioned is the battery size of your car. The reason we mention this again is that only some cars are eligible for a $7500 credit and in most cases, these are EV and not the PHEV.
List of Vehicles Eligible for the Federal Credit
|ELECTRIC VEHICLES||FULL CREDIT||PHASE OUT 50%||PHASE OUT 25%|
2019-2020 Audi e-Tron
2018-2019 BMW i3 & Range Extended
2018-2019 Fiat 500e
2019-2020 Hyundai Ioniq Electric
2019-2020 Hyundai Kona Electric
2019-2020 Jaguar i-Pace
2019-2020 Kia Niro EV
2018-2019 Kia Soul EV
2019-2020 Tesla Model 3 (All Trim Levels)
2019-2020 Tesla Model S (All Trim Levels)
2019-2020 Tesla Model X (All Trim Levels)
2018-2019 Volkswagen eGolf
|PLUG-IN HYBRID VEHICLES||FULL CREDIT||PHASE OUT 50%||PHASE OUT 25%|
2017-2018 BMW 330e
2018-2019 BMW 530e
2018-2019 BMW 740e
2020 BMW 745e
2018-2019 BMW i8
2018 BMW X5 eDrive40e
2018 Cadillac CT6 PHEV
2017-2019 Chrysler Pacifica Hybrid
2016-2020 Ford Fusion Energi
2018-2019 Honda Clarity PHEV
2018-2019 Hyundai Ioniq PHEV
2018-2019 Hyundai Sonata PHEV
2018 Karma Revero
2018-2019 Kia Niro PHEV
2018-2020 Kia Optima PHEV
2018 Mercedes GLE 550e
2019 Mercedes GLC 350e
2018-2019 Porsche Cayenne e-Hybrid
2018-2019 Porsche Panamera e-Hybrid
2018-2019 Subaru Crosstrek Hybrid
2017-2020 Toyota Prius Prime
2019-2020 Volvo S60 Hybrid T8 Inscription
2019-2020 Volvo S90 Hybrid T8 Inscription
2018-2019 Volvo XC60 Hybrid T8
2018-2019 Volvo XC90 Hybrid T8
These are only some of the most popular vehicles as of August 2019. Full lists of both EV and PHEV can be found here. You can filter the table by vehicle type or manufacturer and see the required info for every eligible vehicle you want.
Can Electric Car Tax Credits Run Out?
Of course, they can. Here’s how it works. The government phases out the vehicle tax credits if the sales volume increase. This is based on a theory that the high cost of implementing new technology to a vehicle will decrease due to improved sales, which should eliminate the need for subsidies.
That being said, there is an expiration date for each manufacturer but it only comes after the manufacturer sells 200,000 vehicles. Before that, the expiration date doesn’t exist.
Let’s take Tesla for example. In July 2018, Tesla hit their first milestone, meaning that Tesla vehicles bought anywhere from January 1 to June 30, 2019, are eligible for a total of $3750 of the federal credit.
This further applies to Tesla vehicles bought from July 1 to December 31, 2019, which are eligible for an $1875 federal credit. After that period, there are no federal tax credits for Tesla vehicles. Other examples include Chevrolet and their well-known Volt plug-in hybrid. The Volt is already discontinued as of March 2019. Analysts also predict the same for Nissan Leaf.
Some say that they will reach the milestone this year or in 2020, as the sales for that model aren’t as high as for Tesla and Chevrolet’s aforementioned models.
Why Should You Buy an Electric Car?
If you want to take advantage of federal tax credits, you need to buy either an EV or PHEV. The main reason why one should opt for such a car is purely ecological. By not using gas, you reduce pollution and carbon emissions, which can greatly impact our health around the globe. Not to mention that you won’t need to waste a ton of money on gas.
Electricity will always be there unlike the gas. Scientists approximate that we’re going to run out of gas in a couple of decades, meaning that its price can jump significantly.
Electric cars are also much less prone to breaking thus reducing maintenance costs. As for the acceleration and power, electric cars are on par with the gas-powered vehicles. After all, you can save some cash thanks to the federal tax credits, whereas with conventional vehicles, there’s nothing.
That's It... For Now, Conclusion?
Before you buy an electric car, be sure to check our list and the full list from the source we’ve linked above. Not every electric car is eligible for federal tax credits, especially some Tesla and Chevrolet models we’ve mentioned above.
If you’re meticulous and seek a decent deal without rushing your purchase, you can get an excellent vehicle for an affordable price and still save some cash.