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.
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.
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.