Purchase certain types of hybrid or electric vehicles and you may be eligible for tax relief. That relief may come in the form of a rebate or a credit, the latter applied to your tax return. Federal and in some cases, state incentives were created to ease the cost of buying such vehicles, which typically cost more than conventional gas-powered vehicles due to costly propulsion systems and battery packs.
Federal Tax Incentives through 2010
The U.S. Energy Policy Act of 2005 set in motion a tax credit for people who were interested in purchasing a hybrid electric vehicle. The law was in effect before the first plug-in hybrid models hit the market and were limited to 60,000 vehicles per manufacturer spanning multiple model years. Those incentives shrunk as certain sales milestones were reached, and then eliminated once a manufacturer sold 60,000 units of the eligible vehicles.
The credit amount varied and was based on how efficient or “green” a vehicle was rated. For example, a two-wheel drive 2006-2007 Chevrolet Silverado Hybrid garnered a credit of only $250, while a model such as a 2010 Ford Fusion Hybrid provided the full $3,400 tax credit.
Among the earliest hybrids that came with tax credits were the Toyota Prius, the Nissan Altima Hybrid, the Chrysler Aspen Hybrid and the Mercury Mariner Hybrid. The entire program ended as of December 31, 2010, and included only buyers of eligible new vehicles. It was also the last time that any traditional hybrid model was eligible for a federal tax credit.
Federal Tax Incentives from 2011 to Present
In anticipation of all-new plug-in hybrid and electric vehicles arriving on the market for the 2011 model year, the federal government rolled out a new incentive program that started on January 1, 2010. The new program expanded the tax credit for up to $7,500 per vehicle and provides the full tax credit to the first 200,000 eligible plug-in hybrids and electric vehicles sold per manufacturer.
The new program provides a $7,500 federal tax credit to pure electric vehicles, such as the Nissan Leaf. Other models that qualify under the program include the Smart ForTwo EV, the Tesla Model S, Mitsubishi i-MiEV, Ford Focus EV, Fiat 500e, BMW i3, Mercedes-Benz B-Class EV, and a handful of models that are no longer on the market.
The same program covers plug-in hybrid electric vehicles (PHEV). Some models, such as the BMW i3 Sedan with a range extender, Chevrolet Volt, and the Cadillac ELR are eligible for the full $7,500 tax credit. Other models, including the Ford C-MAX Energi, BMW i8, the Toyota Prius Plug-in, Porsche 918 Spyder, and the Honda Accord Plug-In Hybrid have tax credits ranging from $2,500 to $5,336, depending on the model.
State Tax Incentives: General Information
Early on, several states offered tax incentives to residents on top of the federal incentives. This means that consumers could reduce the cost of buying an eligible hybrid or electric vehicle further.
Some of the incentives involve policy changes that don’t cost the state money. For instance, in Virginia electric vehicle owners are allowed to drive in high-occupancy vehicle (HOV) lanes with certain restrictions, including clean fuel plates installed on these cars. Among the most generous incentives include reduced registration fees, assistance with buying a fast charger, and a sales tax abatement.
The state of California offers taxpayers a rebate of up to $5,000 for the purchase or lease of a new plug-in hybrid, EV or zero-emission vehicle. The last category includes the Hyundai Tucson Fuel Cell and the Mercedes-Benz F-Cell hydrogen vehicles. Both models qualify for the full rebate. Battery electric cars, such as the Kia Soul EV, Volkswagen e-Golf, and the Ford Focus Electric are eligible for state rebates of up to $2,500.
Other states have incentives too or are considering legislation. Your state’s DMV is the best source to determine what incentives apply where you live.
The Tax Angle
Throwing not a little confusion into the mix is how rebates and tax credits are treated. A rebate will give you money back, usually after the purchase has been completed. On the other hand, a tax credit is applied when you file your tax return. Even then, some consumers never realize the full benefit because they make too much money. Thus, the $7,500 tax credit you thought might be applied could very well come in much less than what you had anticipated.
To sum up, there are federal incentives in place on plug-in hybrid electric vehicles and for pure electric vehicles. Some states also offer incentives. Your accountant can help you claim whatever tax credit you qualify for, including filing Form 8834 — Qualified Electric Vehicle Credit — that may reduce your overall tax burden.