This guide will help you understand which cars qualify for the credit in 2020, how to claim the credit, and important things to remember along the way.
Over a decade ago, the Energy Improvement and Extension Act of 2008 was passed, creating a tax credit for plug-in EVs. Congress passed this legislation with the hope that the “next generation” of cars would become more mainstream due to the incentives.
Do I have to buy a new car? Yes. If you purchase a new all-electric or plug-in hybrid, you may be eligible for a federal income tax credit of up to $7,500. To see what cars qualify and what their current tax credits are in the US, check out the official list at fueleconomy.gov. It’s important to note that you are only eligible for the credit if you’ve purchased a new car. Buying a used electric or hybrid car from someone else does not count.
Can I get the tax credit if I lease a car? You most likely won’t get the tax credit if you lease the car. The lessor is entitled to the credit since they technically own the car. When going about leasing a car that is on the list of qualifying vehicles, talk to your lessor to see in what ways they are passing the tax credit down to you. They should be able to pass the credit on to you by lowering your monthly payments.
What determines the credit amount? The credit amount varies based on both the car battery’s capacity and how many cars have been manufactured. If you want to get into the nitty-gritty details of why certain cars have a higher tax credit, check out IRS.gov to see how the IRS calculates what tax credit each model will get.
Can I get the tax credit for a car that isn’t on the official IRS list? Maybe, but probably not. Technically, car manufacturers that aren’t on fueleconomy.gov can qualify for the credit. If you want to purchase an electric car from a company that isn’t on the list, you should check with the manufacturer to see if they are eligible.
Are the tax credits getting phased out? Yes. As the demand for electric and hybrid cars increases, the government has been phasing out the tax credits for some of the more popular models. Once the manufacturer has sold 200,000 eligible plug-in electric vehicles in the US (as of January 1, 2010), the phase-out process begins. The best way to see what credits are being phased out is to check out IRS.gov. On this website, the IRS provides an index of manufacturers and shows what models’ tax credits are being phased out.
What paperwork do I need to fill out to get the tax credit? Unlike many state rebates that require you to fill out an application as soon as you purchase the car, the federal tax credit isn’t given to you until after you file your taxes for the year in which you purchased the car. For example, if you purchased your qualifying car in January 2020, you would need to wait until you file your 2020 taxes (around April 2021) to claim the credit. When you file your taxes, you’ll fill out the tax form called “Qualified Plug-in Electric Drive Motor Vehicle Credit” (Form 8936). You’ll then report the credit from form 8936 on the appropriate line of your individual income tax (Form 1040).
What are the income eligibility requirements for this tax credit? Anyone can claim the tax credit, regardless of income. In fact, the majority of EV credits are claimed by people with adjusted gross incomes above $100,000. In 2016, 7% of credits were claimed by people that had an adjusted gross income above $1 million. This contrasts greatly with many state rebates that have income restrictions on who can qualify. One thing that is very important to remember is that you must have a tax liability that you report on your federal tax return in order to get the tax credit. You can only claim the credit up to the amount of your tax liability. For example, if your tax liability is only $3,000, but you qualify for the Prius Prime plug-in hybrid tax credit of $4,502, you will only receive a credit of $3,000. You won’t receive a check for the additional $1,502.
The biggest mistake one could make would be to assume that your car qualifies for the tax credit, only to find out that it has been phased out. Recently, popular manufacturers such as GM and Tesla, have had all of their tax credits phased out due to their high demand. Make sure that before you purchase your car your tax credit is still available by checking IRS.gov or fueleconomy.gov. As I’ll be trying to keep this guide current, these credits are subject to change as the credits get phased out.
If your vehicle purchase is at all dependent on whether or not you receive the tax credit, we’d suggest talking to a tax preparer beforehand to make sure that you’re all set to qualify. Also, different rules apply for cars purchased for business use, so business owners should keep that in mind.
Overall, if you ensure that your car qualifies for the tax credit, and you have enough taxes to pay to get the full credit, the federal tax credit can be a great way to offset the purchase price of a new electric/hybrid vehicle.