How Do Electric Vehicle Tax Credits Work?

Update 8/9/22: The forthcoming passage of the Inflation Reduction Act is set to alter the federal government's EV tax credit scheme. We'll update this piece once more details are available.

Beginning in 2010, the federal government implemented a program that offers up to $7500 in tax credits to purchasers of electric vehicles. The purpose of the program is to incentivize people to buy more fuel-efficient vehicles by bringing the price of EVs down closer to that of internal combustion vehicles. Some states also jumped in with additional tax credits of their own.

Though some automakers' EVs have already been phased out of the federal program—tax credits decrease based on that company's total EV sales from 2010 on—many vehicles still qualify. Here's your quick guide to tax credits: what they are, how they work, and how they can benefit you.

What Are EV Tax Credits and How Do They Work?

EV tax credits are nonrefundable tax credits that come from buying a vehicle with a battery propulsion system that can draw power from an external power source. The credits are available for both pure electric vehicles and plug-in hybrids. The credits earned depend on a variety of factors and are used to decrease taxes you owed in a given year. For instance, if you bought an EV eligible for a $7500 tax credit and your total federal taxes for the year came to $8500, you would owe only $1000 to the government.

The amount of credits, or tax incentives, that any car can qualify for depends on the size of the battery in the car. Every car that qualifies starts with a base incentive of $2500, and then for every 5 kWh of battery capacity, the vehicle qualifies for another $417 of credits. Vehicles can qualify for up to $7500 of tax credits.

That said, once an automaker sells a total of 200,000 units that qualify for the rebate—it can be a mix of models—a phase-out begins. The available tax credit is reduced by 50 percent for two quarters and then 25 percent for the subsequent two quarters. At that point, the vehicles made by the automaker no longer qualify.

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All battery electric and plug-in hybrid vehicles qualify for the tax incentive; regular hybrid vehicles don’t. As long as the vehicle falls under several requirements such as a curb weight of under 14,000 pounds, has a battery larger than 5 kWh, and can be recharged externally—among other regulations—it qualifies for the credits.

A handful of automakers have been phased out of the program, including General Motors and Tesla. Their vehicles no longer qualify for tax credits. The EPA has a running list of vehicles that qualify, the amount they qualify for, and the dates that the vehicles need to be bought by to qualify for the credits once an automaker reaches the phase-out portion of the program.

How Do You Receive EV Tax Credits?

The process is fairly simple. You first have to buy a vehicle that qualifies, of course. Then you fill out form 8936 along with your tax return. It is important to note that the credits are non-refundable tax credits, as opposed to refundable tax credits. That means that the credits can only be applied to the taxes you owe in a given year, and if you received more in credits than you owe in taxes, you will not receive the difference in the form of a check. (With refundable tax credits, you would receive that check). Additionally, since the credits don’t roll over, you can only apply the credits to your taxes for one tax year.

Keep in mind that you cannot qualify for the credits if you lease the vehicle because you don’t own it— the manufacturer does. In that case, the manufacturer can qualify for and receive the credit; the credit is often figured into the price of the lease, so you receive the benefit indirectly.

What States Offer an EV Tax Credit?

Yes, there are, and they differ from state to state, and in some instances county to county or city to city. Plug In America provides an up-to-date guide on where credits are available across the country.

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