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What Are Electric Vehicle Tax Credits?

Driving an all-electric or plug-in hybrid vehicle can help the environment, but did you know it could also put some extra green in your wallet?

For starters, driving an electric-powered car costs about half as much, on average, as a gas-powered vehicle, according to the Office of Energy Efficiency and Renewable Energy. In addition, electric engines generally have fewer parts to repair, which translates into lower maintenance costs over time.

But wait, there’s more. Purchasing an all-electric or plug-in hybrid vehicle can qualify you for a federal tax credit worth up to $7,500, as well as other incentives of various amounts. The actual tax credit you’ll receive depends on the car you buy and your individual tax information.

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How A Tax Credit Works…

You don’t need to be a CPA to understand the basics of how a tax credit works. Tax credits reduce your tax liability on a dollar-for-dollar basis, meaning that credits can put money back in your pocket by decreasing the amount of tax money you owe the government.

Say, for example, you owe the government $3,000 in taxes in any given year. If you qualify for a $7,500 tax credit, that money gets applied against what you owe in taxes, thereby reducing what you owe to $0. Depending on the type of tax credit, you could receive the remaining $4,500 as cash after your tax debt is eliminated. Most tax credits are “nonrefundable,” which means you don’t get any of the leftover cash after your credit is applied to your balance, and the credit for electric and plug-in hybrid vehicles falls into the nonrefundable category.

While the federal tax credit is advertised as “up to $7,500,” you’ll want to pay special attention to the “up to” part when it comes to determining the actual value of the tax credit. Because the credit is nonrefundable, you’ll only see the full $7,500 if you end up owing $7,500 or more in taxes at the end of the same year you claim the credit; you can’t carry over any excess credit to the next tax year.

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Vehicle Eligibility

Not every all-electric or plug-in hybrid car qualifies for the federal tax credit. A vehicle must meet the following criteria to be eligible:

  • Purchased new from a factory as an electric vehicle
  • Used primarily in the United States
  • Charged from an external source, regardless of battery size
  • Purchased in 2010 or later

Pre-owned vehicles don’t qualify (only the original owner can receive the credit), and the credit goes to the lessor when it comes to leased vehicles. Also not eligible for the tax credit:  any vehicles converted from gasoline to electricity.

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A Jolt Of Reality

Sorry to say, but the federal tax credit for electric vehicles falls under the category of “all good things must come to an end.” Once a car manufacturer sells 200,000 all-electric and plug-in hybrid vehicles, the tax incentive starts to slowly phase out for its vehicles:  In the second calendar quarter after a manufacturer reaches that sales figure, the tax credit drops to 50 percent of its value. After another two quarters, it drops to 25 percent of the original value, and at the start of the sixth quarter the credit is discontinued.