How Do Tax Credits for Hybrid and Electric Cars Work?

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Though plug-in hybrid (PHEV) and full electric (EV) vehicles are often costlier than gas-only models, buyers can offset the price premium through generous federal incentives. State incentives may also be available, depending on where you live.

Federal tax breaks were enacted in 2006 for conventional gas/electric hybrids like the Toyota Prius (unlike PHEVs, these models aren’t plugged in) to spur sales of high-mileage, low-emissions alternative fuel vehicles. They were extended to PHEVs and EVs in 2010. Unfortunately, the credits for conventional hybrids expired at the end of 2010. They’re also set to phase out for an automaker’s PHEVs and EVs once the company has sold 200,000 units.

Federal Plug-in Hybrid Incentives

Plug-in hybrids like the Toyota Prius Prime and Kia Niro PHEV come with a larger battery than conventional hybrids, and this allows them to run for an extended number of miles purely on electricity. As the name suggests, they must be tethered to a wall outlet to afford full electric operation. While their electric driving range is much more limited than an EV’s, PHEV owners never have to worry about being stranded at the side of the road with a drained battery. Once the battery level drops to a certain percentage, a PHEV operates like a standard hybrid. Its operating range is then limited only by the amount of gas remaining in the tank.

Those buying a qualifying plug-in vehicle are eligible for a one-time federal income tax credit that can climb as high as $7,500. The amount of the credit is linked to the capacity of the battery used to power the vehicle. For example, with the 2018 Mini Cooper SE Countryman ALL4 that can run for up to 12 miles on electricity, it’s $4,001. For the Chrysler Pacifica Plug-in Hybrid, with an electric-only range of 33 miles, it’s the full $7,500.

Be aware, however, that this is not the same as an automaker’s cash rebate, which actually reduces a car’s transaction price and, in turn, a buyer’s monthly payments. Instead, a plug-in vehicle buyer claims the credit on his or her federal tax return. More than just a deduction, it’s used to reduce the amount the owner owes in federal income taxes during the year in which the car is purchased.

The amount of the credit you can claim is limited by your tax liability. For example, let’s say you have a $7,500 tax credit, and your tax liability for the year is $20,000. In a case like this, you’d be able to claim the full tax credit. However, if your tax liability was just $5,000, you’d only be able to claim $5,000 from your $7,500 credit. This tax credit cannot be carried over from year to year.

This works differently for those leasing a PHEV or EV. Here, the leasing company (which is legally the car’s owner) claims the federal tax credit and uses it to lower a lessee’s monthly payments.

2018 Chevrolet Bolt EV

Federal Electric Vehicle Incentives

Those choosing full electric cars are eligible for the top $7,500 federal tax credit. However, as mentioned above, EV tax credits are scheduled to phase out for each automaker during the year after the company has sold 200,000 plug-in autos. Tesla Motors reached that milestone during 2018. That means the federal tax credit on the Tesla Model S, Model X and Model 3 will drop to $3,750 for vehicles sold between January 1 and June 30, 2019. The credit will then be reduced to just $1,875 for units sold beginning July 1, 2019, and will be eliminated altogether on December 31, 2019.

General Motors will likely be the next automaker to reach 200,000 total EV sales, probably during 2019. If that indeed happens, the federal tax break for the Cadillac CTS PHEV, Chevrolet Volt and Bolt EV models would phase out beginning on January 1, 2020. Nissan and Ford are the next closest to reaching 200,000 sales, but they’re still probably a few years away from hitting that milestone.

You can check all applicable federal incentives for EVs and PHEVs on the Environmental Protection Agency’s www.fueleconomy.gov website.

taxes

State And Local Incentives

A number of states give PHEV and EV buyers cash incentives of their own in addition to the federal tax credit. Here are some of the leaders in this regard:

  • California: $2,500-$4,500 rebate, depending on income
  • Connecticut: $3,000 rebate
  • Colorado: $5,000 tax credit for purchase; $2,500 for lease
  • Delaware: Up to $2,200 rebate
  • Louisiana: Up to $1,500 income tax credit
  • Massachusetts: Up to $2,500 rebate
  • New York: Up to $2,000 rebate

Other region-based incentives to driving an EV or PHEV include financial assistance to have a home charging station installed, single-rider carpool-lane privileges, free on-street parking and specially reserved spots in municipal and/or airport lots.

Editor’s note: This article was originally published in June 2015. It has been completely updated for accuracy and comprehensiveness. 

By | 2018-10-24T20:54:52+00:00 October 24th, 2018|Car Buying|21 Comments

21 Comments

  1. Electric Motorcycle June 18, 2015 at 12:04 am - Reply

    Nice overview of incentives to buy EVs Matt. I’m planning on making a detailed guide for people when the club opens up to membership.

  2. Steve December 21, 2015 at 5:23 pm - Reply

    What do you mean by “some consumers never realize the full benefit because they make too much money”? Wouldn’t the problem be making too little money, or rather, owing too little tax, since the federal credit is not refundable?

    • Cat March 27, 2016 at 4:07 pm - Reply

      Agree. I’m puzzled by this sentence too.

    • Dominique Dredden January 27, 2017 at 3:35 am - Reply

      I think what it means, is that those who make so much don’t really see much of deduction. Yes, to use common folk it seems like a lot. However, to someone who makes a lot of money it seems like not much of deduction. Does that make sense? That’s how I took the statement.

      • Randolph Spate March 30, 2017 at 6:47 pm - Reply

        it’s not a deduction but a dollar for dollar tax credit against any tax owed

  3. John March 1, 2016 at 1:21 pm - Reply

    I’m in the same boat Steve is, namely the author seems to have the logic backward concerning the tax credit. Seems like making not enough income leads to not paying enough tax to realize the credit deduction on one’s yearly federal income tax. Perhaps we’re both missing something here?

  4. Ed March 9, 2016 at 4:02 pm - Reply

    The author has no clue. The tax liability is what matters here. If your tax liability exceeded $7500, you would be eligible for the credit. So making a lot of money generally means you pay more taxes than someone with little income and you would be in a better position to qualify for the full $7500 tax credit.

    • john May 9, 2016 at 3:15 pm - Reply

      Author may have had in mind the Alternative Minimum Tax or AMT which is how the fat, bloated confiscatory reditributionist government screws you anyway even if you have a lot of legitimate deductions (expenses). VOTE TRUMP and JOIN YOUR LOCAL TEA (Taxed Enough Already) PARTY if you are tired of giving your money to a people who expect you to pay their way.

      • Sean November 4, 2016 at 12:55 pm - Reply

        Taxes also pay 4 the 7th Fleet.

  5. Allen March 20, 2016 at 10:05 pm - Reply

    I think the author may have been implying that the credit has an income cap and phases out once gross income hits a certain threshold.

  6. James April 1, 2016 at 9:32 pm - Reply

    Back in the recent past when a Prius (regular hybrid) as well as other hybrids qualified for a tax credit, I had several other write-offs on an otherwise upper middle class 1040. I didn’t quite realize the tax credit, as my return hit the Alternate Minimum Tax computation. I don’t believe it was that I made too much money but had too many legitimate write-offs. How I understood it. I fully agree though if one doesn’t have income tax at least equal to or greater than the tax credit, you won’t realize the full value of it.

  7. Jeanie April 17, 2016 at 11:59 pm - Reply

    This might be a stupid question but I can’t seem to find the right answer… Can you still get the tax credits back when you purchase a USED electric vehicle? I live in CA and from what I’ve read, the state refund is $2,500 plus $1,500 for low income. I’ve been told that the state and federal tax credits only apply to new vehicles and not USED ones. If anyone can point me in the right direction, I’d appreciate it!

    • joe August 21, 2016 at 9:46 pm - Reply

      what is the answer to above question

  8. Micah November 16, 2016 at 8:01 am - Reply

    I was told in 2011 that the ford escape hybrid Limited’s were not covered under any kind of tax credit. is that true or not?

  9. Brian January 2, 2017 at 6:22 pm - Reply

    I didn’t get me answer from reading this.
    So….I bought a 2016 Toyota Prius in July of 2016, do I get any tax credit? Also, in order to get it, what information would I have to take to my tax professional (H&R Block)

  10. Gregg January 5, 2017 at 10:35 pm - Reply

    I bought a 2016 Hyundai Sonata Hybrid (not plug in) and can’t find anything saying I can take a tax credit for it. Wondering if IRS will be publishing or has published something saying which vehicles qualify for the credit and which do not.

    • Dan Lambesis January 7, 2017 at 10:52 am - Reply

      No federal tax credit for pure hybrids – unless there is some new program. Hybrid vehicle credits ended several years ago. Needs to be a plug-in to qualify for a tax credit. Credit based on size of battery. You can check at fueleconomy.gov to be sure.

      • Gregg January 12, 2017 at 9:49 pm - Reply

        Thanks Dan…I didn’t see my vehicle (2016 Hyundai Sonata Hybrid) on the fueleconomy.gov website so I guess my vehicle is not eligible for the tax credit:(-

        • Terralyn February 7, 2017 at 8:53 pm - Reply

          I found information about the tax credit program which does have the 2016 Hyundai Sonata Hybrid included. https://www.irs.gov/pub/irs-pdf/i8936.pdf There is a link within the PDF that shows the eligibility of vehicles acquired after 2009, which includes the Sonata

  11. david daw March 4, 2017 at 9:49 pm - Reply

    Is there a tax credit for a 2012 Lexus 200-H -non electric?

    Is there a tax credit for a 2013 Prius-non electric?

    We could not find the proper statute that would allow a tax credit for purchasing an original hybrid vehicle? in 2012 or 2013?

    Please reply,

    Need your help,

    David Daw

  12. jim November 16, 2018 at 2:45 pm - Reply

    I live in Indiana. They penalize you in extra fees (up to $100.00) per year if you have a EV or Hybrid. Their logic is you are not paying enough gasoline tax because you don’t use as much gasoline in these vehicles.

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