Electric Vehicle Tax Credits: What You Need To Know
Make Sure You Get What's Coming to You
Confused as to which plug-in cars still qualify for electric vehicle tax credits? Many consumers are, thanks to a dysfunctional Congress that seems to have to wait until the wee hours of the last day possible before acting on measures that authorize — or eliminate — such perks.
The rules are complex and confusion is understandable, particularly because federal rules often are difficult to understand, even for the lawyers who draft them.
This year, for instance, the just-approved American Taxpayer Relief Act of 2013 has a section devoted to plug-in electric vehicles and the tax credits for them. But it takes a deep dive into the 147-page law to see that it only applies to two- and three-wheel vehicles.
The fiscal situation that demanded the new law didn't threaten credits for the plug-in hybrid and all-electric cars and crossovers that make up the mainstream electric-drive vehicle market. Thus, the new law doesn't affect them, except that it now classifies all of them as plug-in electric vehicles, or PEVs.
Plug-in electric vehicle tax credits for four-wheel, highway-legal cars and trucks that use rechargeable electric batteries are based on sales volumes and don't expire according to an arbitrary calendar date. The expiration date is separate for each manufacturer and comes only after an automaker sells 200,000 qualified vehicles. That's a process that could take several years, given present sales rates for plug-in electric cars.
A good car dealership should let consumers know right away which models in its showrooms qualify for various federal, state and regional tax credits and rebates. The dealership also should disclose when it has registered a car in its own name, as is sometimes done with demo vehicles. When a dealership does that, it means the vehicle must be sold as used, even if it has only a few miles on the odometer.
But what's right and what actually gets done are often different things. The smart consumer should go shopping for an advanced-technology electric vehicle fully armed with information, and shouldn't depend on what a dealership might or might not say about the availability of tax credits.
To help consumers who may be interested in electric cars find all applicable tax credits and incentives, Edmunds.com has prepared the following electric vehicle tax credit guide:
Electric Vehicle Tax Credits Can't Be Passed on
One question that occasionally pops up is just who gets to claim the tax credit in the case of low-mileage cars that dealerships sell after having used them as demonstrators or loaner cars.
There was quite a fuss early in the history of the plug-in hybrid Chevrolet Volt when it turned out that several dealerships had, for various reasons, registered new Volts in their own names. By doing so, they made the subsequent retail buyers ineligible for the car's $7,500 federal tax credit.
The answer in the Volt tax credit flap is pretty simple: Only the original registered owner of an eligible vehicle can claim the federal tax credit. Even if the original registered owner didn't apply for the credit for some reason, it cannot be passed along to a subsequent buyer.
In short: A used Chevrolet Volt is no longer eligible for the credit. Neither is any other used EV, plug-in hybrid or other type of vehicle that qualified for federal tax credits when it was new. This is useful to know, because it can be a bargaining point in a used-car purchase negotiation. It might turn out that a new model with the tax credit is a better deal than a used one if the federal tax credit program means the list price for the new model is reduced by up to $7,500.
"Up to" is the critical modifier. The federal incentive is usually referred to as a flat $7,500 credit, but it's only worth $7,500 to someone whose tax bill at the end of the year is $7,500 or more. If the buyer of a Volt, a Nissan Leaf or other eligible vehicle owes, for example, only $5,000 in income tax for a particular year, that's all the tax credit will be. Uncle Sam's not writing a refund check for the other $2,500. And an unused portion of the credit can't be applied against the following year's taxes.
The credits also are based on the electric car's battery size. And for some models, the maximum can fall well below $7,500. The Toyota Prius Plug-in, a hybrid hatchback, only qualifies for a $2,500 federal tax credit.
Electric Vehicle Tax Credits Are Limited
The government is also phasing out the electric vehicle tax credits as sales volume increases. It is doing so on the theory that the high initial cost of adding all that new technology to a vehicle will come down as economies of scale improve with increased sales. That's supposed to eliminate the need for subsidies.
As a result, December 31, 2010 was the deadline for all of the federal tax credits for clean diesels and conventional hybrids, meaning conventional gas-electric models like the Honda Civic Hybrid or Toyota Prius. These vehicles don't have batteries that can be plugged into the power grid. What the federal government still provides to consumers are credits for electric-drive vehicles with plugs — only.
A $4,000 credit for vehicles with dedicated natural-gas fuel systems expired December 31, 2011. Natural gas proponents are still trying to get it reinstated.
The list of electric vehicles eligible for a federal tax credit is available at the Energy Department's fuel economy tax center site, which is updated as vehicles are added or deleted. Right now, the roll of qualifying vehicles is pretty short. It will grow with the introduction of new plug-in cars and trucks.
As of this date, several cars are eligible for the maximum $7,500 credit. There are two plug-in hybrids: the new BMW i3, when purchased with the optional range-extending internal-combustion engine-generator, and the Chevrolet Volt. Battery-electric cars include the Chevrolet Spark EV, Fiat 500 EV, Ford Focus EV, Honda Fit EV, Mitsubishi i also known as i MiEV, Nissan Leaf, Smart Fortwo Electric Tesla Model S, Toyota RAV4 EV, Wheego Life and the BMW i3 without the range-extending engine-generator.
The Ford C-Max Energi and Ford Fusion Energi plug-in hybrids each qualify for a $4,000 federal tax credit; the Honda Accord Plug-In Hybrid rates a credit of up to $3,625, and the Toyota Prius Plug-In qualifies for a $2,500 income tax credit.
There are several battery-electric commercial vehicles that qualify for tax credits as well. At least one of them, the Ford Transit Connect EV, can also be purchased for personal use. On its site of qualifying vehicles, the IRS lists it as an Azure Dynamics Transit Connect because a Michigan company, Azure Dynamics, supplies the electric drive system.
For all these cars, consumers can only claim the credits for vehicles purchased after December 31, 2009. The credits begin phasing out for each manufacturer after it has sold 200,000 models of each car.
The new Taxpayer Relief Act restored until the end of 2013 a credit of 10 percent of the purchase price, up to a maximum of $2,500, for qualified electric motorcycles and three-wheel EVs with a battery capacity of at least 2.5 kilowatt-hours. It made the credit retroactive to vehicles purchased after December 31, 2011. That's when the credit initially had been allowed to expire.
At the start of 2012, Congress let die a federal credit of up to $2,500 for four-wheel, low-speed neighborhood electric vehicles (NEVs), which are limited to a top speed of 25 mph. But shoppers interested in those vehicles might want to check individual state and regional programs. Some, like California's Clean Vehicle Rebate Project, still are open to qualifying electric motorcycles and NEVs.
Conversion fans also are out of luck. A 10 percent credit (up to a maximum of $4,000) for the cost of converting conventional gas vehicles, diesel vehicles or conventional hybrids to plug-in hybrid or all-electric powertrains expired at the start of 2012.
The Fine Print of Electric Vehicle Tax Credits
In addition to the rule that limits the federal tax credit to the original buyer of a qualified advanced-technology or alternative fuel vehicle, there are a few other conditions that consumers should know about:
- If a vehicle is being leased, the credit stays with the leasing company, which is the actual owner of the car or truck. In most cases, however, the tax credit has been factored into the cost of the lease, so the customer still benefits. Lease programs for the Chevrolet Volt and Nissan Leaf, for instance, include the $7,500 as a credit toward the down payment.
- The federal tax credit isn't applicable to an electric vehicle being purchased for the purpose of reselling it. That's a gray area — and would be tough for authorities to prove.
- The vehicle must primarily be used in the United States.
- Plug-in and battery-electric vehicles must be built by qualified manufacturers in order to qualify for the full $7,500 credit.
- Plug-in hybrids and battery-electric vehicles also must have battery packs that are rated for at least 4 kWh of energy storage and are capable of being recharged from an external source.
- The IRS says that manufacturers are not required to certify to the agency that vehicles meet the requirements to qualify for the various credits. For vehicles not listed on the Energy Department Web site or on the IRS list of qualified vehicles, a buyer can generally rely on the manufacturer's representation that the vehicle is eligible. That statement can either be in writing or on the company's Web site. The same thing goes for electric motorcycles, plug-in and EV conversions, three-wheel EVs and low-speed EVs. The IRS, of course, always reserves the right to reject a claim for a tax credit.
Tax Credits From States and Other Sources
While the federal tax credits for plug-in and natural gas vehicles get the most mention, there also are a plethora of state and regional incentives on plug-in vehicles and those that use alternative fuels. Alaska is the only state without any sort of incentive, while many states have a dozen or more programs. Many, however, apply only to businesses. Some credits come in the form of exemptions from fees and inspections. Others are non-monetary incentives such as carpool lane access and free parking.
Retail buyers in at least 13 states can get some cost relief in the form of tax credits, rebates, reduced vehicle taxes or registration fees for buying a qualified alternative-fuel or electric-drive vehicle. In California, for example, people who buy or lease a full-service electric car such as the Nissan Leaf, Honda Fit EV, Tesla Model S or Ford Focus EV can get a $2,500 cash rebate. That's in addition to the federal tax credit and reduces the out-of-pocket cost of the car by as much as $10,000. Because they have smaller batteries and burn petroleum-based fuel part of the time, the Chevrolet Volt, Ford C-Max Energi, Fusion Energi, Honda Accord Plug-In and Prius Plug-In are eligible only for $1,500 California rebates. To see what your state offers, check the Energy Department's interactive state incentives chart.