Tech’splaining: What Is An Electric Vehicle Tax Credit And How Do They Work?

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  • EV tax credits are available from the federal government, as well as some state and local governments.
  • Don’t think of EV tax credits as cash on the hood, they’re more like mail-in rebates.
  • Claiming an EV tax credit shouldn’t cause headaches, though meeting with a tax expert can help.

There are noble and ecologically-minded reasons to buy an electric vehicle, but it’s okay to admit that saving money is also attractive. Many of today’s most popular electric vehicles come with sizable tax credits, which can be available at the federal, state and local level. These credits can trim thousands of dollars from the up-front cost of an all-electric vehicle or a plug-in hybrid. But the size of the rebate depends on several factors, including battery capacity and how many qualifying EVs an automaker has sold.

To find out more about the process, we got in touch with Alison Flores, Principal Tax Research Analyst with the Tax Institute at H&R Block. Flores explained the entire process, beginning with finding out whether or not the vehicle you’re considering is eligible. She also took a look at the forms involved, where you’ll see your savings, and how an EV credit fits into your overall yearly tax structure.

Ride: What is an electric vehicle tax credit? How does it work?

Alison Flores: If you purchase a new vehicle with a rechargeable battery, you may be eligible for a federal tax credit. The credit ranges up to $7,500, based on battery capacity and other factors. One factor is how many qualifying vehicles produced by the manufacturer have already been sold when you make your purchase. The vehicle manufacturer works with the IRS to get vehicle models approved. You should know at the time of purchase if the vehicle qualifies for the credit and the maximum potential value of the credit. [More info here.]

Tesla Model S
Tesla Model S

After I buy an electric car, what forms do I fill out to claim the credit? Is it easy to claim?

You claim the credit on your federal tax return for the year you place the vehicle in service (the year you start using the car). That’s important because some vehicles are pre-order and you do not take delivery or complete the purchase until a later date. 

You calculate the credit on Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit. You’ll need to provide information such as year, make, model, VIN, and the date the vehicle was placed in service.

The maximum amount of credit you can claim starts to decrease (eventually down to $0) after the manufacturer has sold 200,000 qualifying electric vehicles. Tesla and General Motors are already in their phaseout periods. If your purchase is subject to phaseout, this will also be calculated on Form 8936. The process should be fairly easy to complete. 

When will I receive the tax credit? How will I know I receive it?

Your electric vehicle credit will reduce your tax liability. Many taxpayers will essentially receive a refund of some of their federal income tax withholding or their estimated tax payments when they claim the credit. If you are expecting a tax refund from the IRS, you can check the status at “Where’s My Refund?”

However, the credit itself isn’t refundable. That means if you use the car for personal purposes and you don’t have enough tax liability to use up your credit, the unused credit is lost. If you use the car for business, you may be able to carry the unused portion of the credit to a different year.

Chevrolet Bolt
Chevrolet Bolt

What else does a car buyer need to know about the electric vehicle tax credit?

The tax credit isn’t claimed at the time of purchase or when you start using your car, unlike a [manufacturer] rebate on a purchase price. There will be a gap between the time you buy the car and the time you claim the credit on your tax return. Many buyers find that because they are able to claim this tax credit, they will receive a tax refund when they file their taxes.

But because the electric vehicle credit is just one part of the tax return, and other factors impact the buyer’s tax situation, the tax consequences can vary. Buyers with questions about the tax credit may benefit by asking their tax professional for more information about how the credit will impact their tax return.

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