Published June 6, 20175 min read
How would you like to save five figures on your next vehicle? Thanks to generous tax incentives, electric cars give you the opportunity to help save the environment while also saving a lot of money on your next new car. Federal and state tax incentives mean qualified buyers can get up to $12,000 off the purchase of an electric or hybrid car. Interested? You should be. First we’ll look at the federal tax credit program, then get into the programs that are available at a state level. Let’s get started.
Both electric and gas-electric vehicles qualify for federal tax credits but the biggest credits go to all-electric cars and hybrids with large battery packs. Some of the federal tax credits available for popular electric vehicles sold in the United States include:
The technicalities of the federal electric car tax credit program are sometimes confusing for consumers, so let’s break it down.
Let’s say you buy a new Tesla Model S. Since it currently qualifies for the full $7,500 federal tax credit, your tax liabilities will be reduced by $7,500. But what if you owe less than $7,500 in taxes? Well, you’re out of luck. Since it’s a credit, the $7,500 only applies to amounts you owe. If you owe $6,000 in federal taxes, you’ll only get a $6,000 credit, and lose out on the remaining $1,500. The credit does not roll over to other years, so you can’t expect to use the rest of the credit on next year’s taxes—it’s gone forever.
This situation has created confusion to consumers who thought that buying a vehicle results in a rebate check for $7,500 from the government. While some government programs do operate on a rebate system (where you just get the money back in cash) this one does not. However, some state programs, like California’s electric vehicle incentives, do operate on a rebate system. Be sure you know the difference when calculating how much you can save by buying an electric vehicle.
If you’re lucky, you can stack federal and state credits for a massive discount off your next vehicle. For example, California offers a $4,500 rebate on qualifying electric vehicles. You can pair that with a $7,500 federal tax credit for an effective $12,000 off your next car.
Not all tax credits or rebates are permanent. Georgia had a generous $5,000 tax credit, but it was repealed in 2015. And be sure you read the fine print. California has imposed income limitations on its $4,500 electric vehicle tax rebate, so many people with high incomes will no longer qualify. State-level incentives frequently change, so check before you buy to see when is the best time for you to purchase a qualifying vehicle.
If you lease a qualifying vehicle, the program works slightly differently. In this case, the party leasing the vehicle gets the federal tax credit. But this is usually factored into your lease agreement, resulting in a correspondingly lower lease.However, this is not a legal requirement, so if you are going to lease a hybrid or electric vehicle, do the math and double check that you are getting a corresponding discount on your lease.
The federal credits won’t be around forever. They operate under a slightly confusing system related to the sales of electric vehicles. Once a manufacturer has sold its 200,000th qualifying electric vehicle, the federal credits slowly begin to expire on a quarterly system.Let’s use Tesla as an example. After their 200,000th vehicle is sold, the full tax credit remains in effect for the rest of that quarter, and then the full quarter after that. (Depending on when that vehicle is sold, that period could last from 3 months and 1 day to exactly six months.)
During the next two quarters (six months), the credit is still available, but at only half of its original value. For a Tesla Model S, the credit will now be worth $3,750. Six months after that, the credit will be halved again and will only be $1,875. By the end of that six-month period, there will be no more credits available for vehicles purchased from that manufacturer. However, credits for vehicles from other companies that have not yet sold their 200,000th electric vehicle will still be around.The electric car tax credit doesn’t apply to used or pre-owned cars, so once the manufacturer sells through the first two hundred thousand, opportunities to save on a zero-emissions vehicle will dwindle quickly.The moral of the story? If you want the federal tax credit, you’ll need to buy a qualifying vehicle sooner rather than later. But once one company’s credits expire, you can still buy an electric vehicle from another manufacturer who hasn’t met the quota to get the credit.Those with their heart set on a Tesla will want to act fast: as of December 2016 the company had sold 186,000 cars worldwide. The 200,000-car policy applies to U.S. sales, but they still may reach that number quickly – as soon as early 2018.
Electric cars are becoming more and more popular—and we can expect the tax credits and rebates to eventually end. Georgia has already eliminated their program, while California has begun to impose income limits. Meanwhile the federal credits are designed to expire when too many electric vehicles have been sold.The next few years are likely to offer the best tax credits and rebates on electric vehicles that you will see for the rest of your life. There’s never been a better time to go electric.
Get essential money news & money moves with the Easy Money newsletter.
Free in your inbox each Friday.