How Does the Electric Car Tax Credit Work?

The last 10 to 15 years have seen incredible progress toward vehicles with power sources other than gas. Fully electric and hybrid vehicles are no longer the domain of the Jetsons but are a common sight on local roads and highways. The infrastructure for charging electric cars is also in expansion mode, with stations being installed in places like malls or town centers.

State and federal governments long ago recognized that if electric vehicles were to become popular, the day-to-day driver might need some help through rebates or tax incentives. The federal electric car tax credit is the primary federal program designed to encourage the purchase of electric vehicles.

How Does the Electric Car Tax Credit Work?

Despite all the notable progress, the cost of an electric or hybrid vehicle remains slightly higher than the cost of a vehicle with a legacy gas engine. In response, Congress enacted the Plug-In Electric Drive Motor Vehicle Credit program, applicable to buyers of both electric and hybrid engines.

The program provides buyers with a tax credit between $2,500 and $7,500. The size of the credit depends on the capacity of the battery in the vehicle you purchase. A fully electric vehicle, for instance, will likely qualify for the full credit, while a hybrid should register for something slightly less. But there are exceptions.

Remember that a tax credit is different from a deduction. A tax credit directly lowers your total tax bill, whereas a deduction lowers the amount of gross income subject to tax. The credit could even erase your tax bill.

Who Is Eligible for the Electric Car Tax Credit?

Image via Flickr by automobileitalia

To qualify for the federal tax credit, your car must meet certain criteria. Generally speaking, it must have four wheels and weigh less than 14,000 pounds, according to IRS.gov. The car also must get its power from a battery, rechargeable from an external source, with a capacity of at least four kilowatt-hours.

The program only applies to new cars purchased after 2010, and you have to claim the credit in the tax year in which you began driving it — in other words, the credit does not roll over. It’s also only available for a purchase. If you lease an electric vehicle, the credit applies to the manufacturer.

Perhaps more importantly, the credit phases out, as it achieves the desired impact of encouraging the purchase of electric vehicles. Under the terms of the program, the credit is no longer available to a specific manufacturer once that manufacturer sells 200,000 qualifying vehicles.

What Tax Credit Can I Expect?

The Department of Energy publishes an updated schedule on its website so you know ahead of time how much of a tax credit your electric or hybrid vehicle will qualify for under the program. Here are a few examples:

• Audi e-tron Sportback and SUV: $7,500.
• Volkswagen ID.4: $7,500.
• Nissan Leaf: $7,500.
• Toyota Prius Prime: $4,502.
• Kia Niro Plug-In Hybrid: $4,543.
• Lincoln Corsair Hybrid: $6,843.
• Chrysler Pacifica Hybrid: $7,500.
• Ford Focus and Ford Mustang: $7,500.

Tesla vehicles, as well as vehicles from General Motors and certain Cadillac vehicles, have hit the 200,000-vehicle threshold and are no longer available for the tax credit, according to the Department of Energy.

By the way, an important note: The electric car tax incentive cannot exceed the size of your tax bill. Say you buy a new Lincoln Corsair electric vehicle but only owe the government $6,000 in taxes. You will receive only the $6,000 tax credit. The government isn’t going to pay you the additional $843 tax credit via separate check.

Do States Offer Incentives?

Many states have decided also to offer tax credits for the purchase of electric vehicles, including the state of Michigan, which is at the heart of innovation in the auto industry. That state has taken a unique approach by offering these infrastructure incentives for the development of both commercial and private charging stations. For example, DTE Energy, a Detroit-based electric-services company, currently offers a $500 rebate to customers who purchase or lease an electric vehicle and also install an approved Wi-Fi-connected Level 2 charger at their home. Participants must also enroll in a year-round “time of use” program for paying for the electricity.

Michigan Consumers Energy, another provider, also offers residential homeowners rebates of up to $500 for the installation of home charging ports. The incentives for commercial companies to install industrial-grade stations go even higher, with the state itself offering sizable credits on commercial fast-charging units.

What Does the Future Hold?

As of 2021, the possibility exists that the electric car tax credit program will not only continue but potentially expand. The new presidential administration of Joe Biden has proposed $100 billion in subsidies for electric-vehicle buyers, which could extend the credit to used electric vehicles. Meanwhile, a separate bill proposes increasing the tax credit itself to $12,500. Driving these proposals is a recognition that other countries have taken the lead in electric vehicles. While the fate of these new policies is uncertain, it’s always smart to check with your dealer or your tax adviser on what the latest incentives, if any, might be.

Take the Chevrolet Bolt for a Test Drive Today

Now that you know more about state and federal electric car tax credits, visit Applegate Chevrolet to take the Chevrolet Bolt electric vehicle for a test drive. We’re one of the leading Chevrolet dealers in southeast Michigan, maintaining a full selection of new cars, trucks, crossovers, and SUVs for sale.

As a full-service dealership, we also have a sizable inventory of used cars for sale, and not just from Chevrolet. Our used car inventory includes models from all the major manufacturers, including Buick, Ford, Jeep, Nissan, Toyota, Cadillac, GMC, and Volkswagen. Make sure you also check out our selection of certified pre-owned Chevrolet vehicles, which include extended warranties and other benefits.

Our team stands ready to help you find a loan or lease deal that fits your budget, and we are always ready to provide after-sale service and repair to keep your car on the road as long as possible. Call us or contact us today to make an appointment. Let Applegate Chevrolet show the way!