How does the electric vehicle tax credit work?
How Much Can You Deduct?
The federal electric car tax credit is only available on certain electric and plug-in hybrid vehicles, and the maximum amount available is $7,500...which is ultimately based on the vehicle's battery pack capacity. All battery-electric vehicles are eligible for the full credit, but not all plug-in hybrids are.
The full list of vehicle credits available is located on the U.S. Department of Energy’s website. Click here to access.
- Electric vehicle must have capability of being charged from an external source (regardless of battery size)
- New vehicles only
- Pre-owned or vehicles that have been converted from gasoline to electricity are not eligible
- Vehicle is direct from the factory
- Vehicle must be used primarily in the U.S.
- Top name on title of vehicle is credit recipient (generally you, if you own…credit goes to leasing company on most leases)
- Only available in the year that you put the car in service
- Credit only covers any federal tax you owe
- To qualify for the full amount available, you must have a federal tax liability in the year you purchase the vehicle that meets or exceeds the incentive amount. If the vehicle has a $7,500 tax credit available, and you only have a tax liability of $2,500, you can only take a $2,500 vehicle tax credit. But if you have a federal tax liability of $8,000, you can take the full $7,500 credit.
- NOTE: Withholdings have no impact on credit usability. As such, federal tax liability as written above refers to total tax, not the refund/amount owed as result of your filed tax return.
- For example, if you have the tax liability of $8,000 as mentioned above, and have only $6,000 withheld, you'd still get the full credit of $7,500 regardless of withholdings. That's because your total tax exceeded the $7,500...even though your tax return would result in you owing $2,000 due to having short withholdings (you're not limited to a $2,000 credit just because that's what your tax return says you owe for taxes). In other words, you don't need to owe $7,500 as a result of your tax return to get the full credit, you just need to have a total tax (as per line 63 on 2017 returns) that exceeds $7,500 in the car purchase year to get the full credit. You can get a reduced credit up to the amount of your total tax, if it's less than the $7,500 max.
- Excess unused credits cannot be carried from year to year.
Ways to Avoid Losing The Credit
- Consider an IRA conversion (Traditional to Roth) to increase taxable income and corresponding tax (recommended if total tax is less than credit amount). This will give you full credit, plus move future distributions from being taxable to non-taxable.
- Consider bunching itemized deductions in the tax year before and tax year after your vehicle purchase year.
- Above are only advised if you won’t get max credit. Check with us first.
How Do You Get the Credit?
- At tax prep time, provide us with your purchase paperwork and corresponding credit info from the dealer
- The electric car tax incentive program does have a phase out, which applies after each car manufacturer sells 200,000 plug-in electric vehicles. Check with your dealer for more details.
- Very few manufacturers are subject to this limitation as of 2018.