Understanding Electric Vehicle Tax Credits & How Proper Tax Planning Can Make All The Difference
Have you ever thought about buying an electric vehicle (EV), but realized it may be a little too expensive for you? I want to show you how you can take advantage of both federal and state tax incentives to make your dream of owning a Tesla or other EV come true!
Federal tax incentives for purchasing a hybrid or EV have been around since 2005. In order to assist car manufacturers that invested heavily in new technologies to build EVs, the government granted tax credits to consumers to accelerate their acceptance of EVs.
The current federal tax credit available (Qualified Plug-In Electric Drive Motor Vehicle Credit) is based on the vehicle's battery capacity, with a maximum allowable credit of $7,500. It is a non-refundable credit that can reduce your tax liability to $0, but it cannot generate a refund. For example, let's assume that you qualify for the maximum $7,500 credit and your tax liability at the end of 2018 is $3,500. The credit will reduce your tax liability to $0, but the remaining unused credit of $4,000 is lost and cannot be carried over to future years.
Not all EVs qualify for the full $7,500. Go to https://www.irs.gov/businesses/qualified-vehicles-acquired-after-12-31-2009 to check your vehicle's eligibility and amount of qualifying credit.
Do I have to be the original car owner? Yes, in order to qualify for the Qualified Plug-In Electric Drive Motor Vehicle Credit, you must be the original registered owner of the vehicle. Used EVs and resales are not eligible for the credit.
What if you lease an EV? When you lease an EV, the credit goes to the manufacturer that offers the lease. Ultimately, this should get factored into your lease payment and produce some savings on your monthly lease payment.
Is the credit a rebate? There are a lot of misconceptions about how to claim the Qualified Plug-In Electric Drive Motor Vehicle Credit. Many are under the impression that the credit acts as a rebate which reduces the price of the vehicle when you purchase. The credit is claimed by filing Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit, with your individual income tax return.
When can I get my credit? So let's say you purchase your EV in January of 2018. You would not be able to claim the credit until you filed your 2018 Form 1040 in 2019. There are planning strategies available to expedite receipt of the credit by reducing your withholding/estimated tax payments to enable use of the funds during the year of purchase. I will go into detail on some tax planning strategies in a separate article.
Will this credit last forever? Unfortunately, the maximum EV credit is only available until the manufacturer sells 200,000 qualified vehicles in the US (Tesla was the first to do so in July). Once the threshold is reached, the credit begins to phase-out for that manufacturer at the beginning of the second calendar quarter after the manufacturer reach the 200k limit. Consumers interested in purchasing a Tesla and obtaining the maximum $7,500 credit need to purchase the EV by December 31st of 2018 to qualify.
Do all states offer this credit? Dozens of states offer tax incentives for electric and plug-in vehicles. State programs range from tax credits to rebates as well as reduced registration fees and taxes. Check the availability of programs in your state by visiting the US Dept of Energy website.
Maryland offers an Excise Tax Credit up to $3,000 to buyers and leasers of plug-in electric vehicles whose purchase price does not exceed $60,000. The credit is available through June 30, 2020. Your dealer should be able to assist you with completing the proper form to claim the credit.
Visit https://www.energy.gov/eere/electricvehicles/electric-vehicles-tax-credits-and-other-incentives to find out more.