By; Sam Battista
To protect the environment and combat climate change, Congress passed laws resulting in Internal Revenue Code Section 30D, which provides a tax credit for the purchase of qualified electric motor vehicles. Let's discuss what vehicles qualify and other important details about the Plug-in Electric Drive Motor Vehicle Credit. Aspiring Tesla owners should pay close attention.
The Plug-in Electric Drive Motor Vehicle Credit (electric car tax credit) is a short-term incentive to offset the initial higher purchase price of qualified vehicles. This federal tax credit ranges from $2,500 to $7,500 for qualified electric vehicles that draw energy from a battery. The credit is non-refundable, so to enjoy its benefits, you must have a federal tax liability in the year of purchase and file Form 8936 to claim the credit.
What is a Qualifying Vehicle?
Qualifying vehicles are defined as an all-electric or plug-in hybrid car purchased in 2010 or after, primarily used by the owner, and used mostly within the United States. The vehicle can be charged by an external energy source. The IRS provides a list of approved vehicles, sorted by manufacturer, that are eligible for the electric car tax credit and the current credit available.
When Does the Credit Expire?
The electric car tax credit phases out when a manufacturer sells 200,000 total qualifying vehicles, no matter the model. The credit is cut in half, from $7,500 to $3,750, in the second calendar quarter until the end of the third calendar quarter after an automaker reaches the 200,000-car threshold. It is then cut in half again, for the next two quarters, to $1,875, until the allowable credit is $0 one full year later or four calendar quarters after the phase out begins.
Tesla and General Motors are the only manufacturers that have reached the 200,000-car milestone, meaning new purchases of qualifying vehicles from these manufacturers are not eligible for the electronic car tax credit. Tesla reached this mark in July of 2018, so the 50% credit phase out began in January 2019 and ran through the end of June 2019. From July 2019 through December 2019, the credit was reduced to 25%. After January 1, 2020, the credit was completely phased out to $0 for new buyers.
Who is eligible for the tax credit?
After confirming the acquired vehicle qualifies, remember the credit is non-refundable and thus requires a federal tax liability in the year of purchase to be utilized. If your tax liability in the year of purchase is lower than the available credit, the credit is capped at your applicable tax liability. For example, if the available credit is $7,500 but your federal tax liability is $3,000 in the year of purchase, the maximum credit is $3,000. No carryover credit is available.
State and Local Tax Credits or Rebates
Besides the federal electric car tax credit, some state and local governments and utility companies offer similar credits or rebates for electric car purchases. Each state and locality will vary, so research and understand how and when to avail yourself of any available credits or rebates. For example, in Pennsylvania, to receive an Alternative Fuel Vehicle Rebate, a rebate application must be submitted within 6 months from the vehicle purchase. If you purchased a vehicle in May and waited for your tax advisor to comment during the following year’s tax filing season, you missed the deadline for the PA rebate.
The combined savings from federal, state, and local tax credits or rebates can be a significant financial incentive to purchase an electric car and do your part to help protect the environment. Potential buyers with their heart set on a Tesla or GM electric vehicle should not fret. There are dozens of other auto manufacturers that offer qualifying electric cars with tax credits still up for grabs.