Are you considering buying a new plug-in electric vehicle or a plug-in electric-gas hybrid vehicle? There is good and bad news about the tax credits and other cost-saving benefits available on these vehicles.
The good news is that the Tax Cuts and Jobs Act didn’t eliminate the federal income tax credit for purchasing plug-in electric vehicles. But the bad news is that credits for Tesla and General Motors (GM) vehicles are being phased out, because these manufacturers have already sold the threshold number of credit-eligible vehicles allowed under the tax law. Here’s the updated story on this potentially valuable federal income tax break.
The Basics
You can claim a federal income tax credit for buying a qualifying new (not used) plug-in electric vehicle. The credit can be worth up to $7,500.
To be eligible for the credit, a vehicle must:
- Draw propulsion from a battery with at least four kilowatt hours of capacity,
- Use an external source of energy to recharge the battery (thus the term plug-in),
- Be used primarily on public streets, roads and highways,
- Have four wheels,
- Meet applicable federal emission and clean air standards, and
- Be used primarily in the United States.
A qualifying vehicle can be either fully electric or a plug-in electric-gasoline hybrid. In addition, the vehicle must be purchased rather than leased, because the credit for a leased vehicle belongs to the manufacturer. However, the allowable credit may be factored into a lower lease payment, especially if you request it from the dealership during lease negotiations.
The credit equals $2,500 for a vehicle powered by a four-kilowatt-hour battery, with an additional $417 for each kilowatt hour of battery capacity beyond four hours. The maximum credit is $7,500. Buyers of qualifying vehicles can rely on the manufacturer’s or distributor’s certification of the allowable credit amount.
The credit can be used to offset your regular federal income tax liability and any alternative minimum tax (AMT) bill. Since there are no income restrictions, even billionaires can qualify.
Phaseout Rule
The credit begins phasing out for a particular manufacturer over four calendar quarters once it sells more than 200,000 qualifying vehicles for use in the United States. Both Tesla and GM have reached this milestone.
In Notice 2018-96, the IRS announced that Tesla had sold more than 200,000 qualifying vehicles through the third quarter of 2018. So, the phaseout rule has been triggered for Tesla vehicles, effective as of January 1, 2019. The credit for Tesla vehicles purchased between January 1, 2019, and June 30, 2019, is reduced to 50% of the otherwise allowable amount. For Tesla vehicles purchased between July 1, 2019, and December 31, 2019, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for Tesla vehicles purchased after December 31, 2019.
Likewise, in Notice 2019-22, the IRS announced that GM had sold more than 200,000 qualifying vehicles through the fourth quarter of 2018. So, the phaseout rule has been triggered for GM vehicles, effective as of April 1, 2019. The credit for GM vehicles purchased between April 1, 2019, and September 30, 2019, is reduced to 50% of the otherwise allowable amount. For GM vehicles purchased between October 1, 2019, and March 31, 2020, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for GM vehicles purchased after March 31, 2020.
Other Possible Cost-Saving Benefits
Electric vehicle buyers and lessees may also qualify for other cost-saving benefits for buying or leasing electric vehicles. Examples include:
- State income tax credits,
- City rebates,
- Reduced utility rates for charging,
- Reduced vehicle taxes and registration fees,
- Discounted auto insurance rates, and
- Access to high occupancy vehicle (HOV) lanes.
For example, Colorado offers a state income tax credit of up to $5,000 to buyers of qualified plug-in electric vehicles and up to $2,500 to lessees. Moreover, the credit for buyers can be assigned to the dealership or finance company in exchange for the dealer slashing $5,000 off the purchase price. This option makes the credit immediately available when the vehicle is purchased.
Do You Have Questions?
The electric vehicle credit is a potentially valuable federal income tax break, but it’s subject to a phaseout rule that has become an issue for Tesla and GM vehicles. Contact us if you want more information about the federal tax credit and other local incentive programs for these vehicles.
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