Get a Tax Credit for Buying an Electric Car
Everyone has to pay taxes and although it sometimes feels a little like lost money, paying your share can sometimes work to your advantage. Recently many governments have begun offering tax incentives on greener purchases that benefit the environment and reduces your carbon footprint. If you are considering going greener on your vehicle, you could be eligible for tax credits.
What Is A Tax Credit?
A tax credit is a return of money from your taxes. Unlike deductions, tax credits reduce the actual amount of tax due. Tax credits are used to influence certain buying decisions such as when replacing heating systems or vehicles, to encourage purchases that are greener and more energy-efficient.
Tax credits are more valuable than tax benefits or allowances since tax credits decrease the tax burden dollar for dollar just under the marginal tax limit of the taxpayer. For example, a taxpayer in a 22 percent tax category will gain $0.22 for every marginal tax dollar deducted. Whereas a refund would raise the tax obligation by $1.
Nonrefundable Tax Credits
Nonrefundable tax credits are automatically excluded from the tax obligation once the tax owed is equivalent to $0. Any value greater than the tax due would result in a rebate, hence the term ‘nonrefundable’. The remaining portion of the nonrefundable tax benefit is lost.
Refundable Tax Credits
Refundable tax credits are the most valuable deductions since they are paid back in full. The taxpayer, regardless of income or tax liability, is eligible for the maximum value of the allowance. If the refundable tax deduction reduces the tax obligation to less than $0, then a refund is available. As of the tax year 2019, the most common refundable tax credit is the Earned Income Tax Credit (EIC). Refundable tax credits include the Premium Tax Credit, which creates compensation for health care costs paid into the private insurance sector.
Partially Refundable Tax Credits
A few tax credits are partially refundable, which lowers taxable income and tax obligations. The Child Tax Credit became a partially refundable credit in 2018 with up to $1,400 per qualifying infant. Another example is the American Incentive Tax Credit (AOTC) for post-secondary graduates. Taking the maximum portion of the $2,500 tax allowance decreases the tax obligation to $0, and is offset as a refundable benefit of less than 40% of the benefit of $1,000.
Electric Car Credit
An electric car is still an expensive purchase; however, in some instances, purchasers are eligible for tax credits as a cashback.
The Federal Qualified vehicle credit can come with up to a $7,500 cash back if filed on a federal tax return. Depending on location, there are additional federal, community and service benefits in the form of discounts.
It is well worth taking a look at the federal electric vehicle (EV) tax credit to find out which vehicles are included and the benefits that could be open to you.
To promote purchases of plug-in electric vehicles or EVs, the federal government began a tax-based incentive in 2010 although the tax credit does not exceed $7,500 per car. The two main points considered, among several, were each vehicles’ battery capacity and the tax obligation. The credit is nonrefundable, and although it can decrease federal tax liability to zero, it does not result in a tax refund.
A tax credit is not a rebate and there is no cashback. After you buy your EV, complete and submit IRS Form 8936 with your federal tax return to claim your credit. If you are not sure how to complete the application, ask a tax professional.
Which Cars Qualify For Federal Tax Credits?
It’s important to check. An EV can qualify for the tax credit when it is an all-electric vehicle. You can get the same if you buy plug-in hybrid vehicle, but it needs to use a battery of no less than 4kw hours. However, certain versions will begin to phase out as the supplies hit a threshold — more on that below.
All-electric cars operate just on electricity, whereas plug-in hybrids or PHEVs work on a combination of electricity and gasoline.
The qualifying cars
- have to be brand new and purchased after December 31, 2009. You must have bought the car and started using it in the year you demand the credit.
- must be driven primarily in the U.S.
- have to be included in the Tax credit phaseout
The federal tax incentive continues to be phased out for cars from the beginning of the second period of the fiscal year after the automaker had produced 200,000 eligible cars post January 1, 2010.
The Qualified Plug-In Electric Drive Motor Vehicle Benefit for GM’s electric car models began phaseout for qualifying cars bought between April 1, 2009 and September 30, 2019. Such cars usually qualify for a maximum credit of $3,750. On qualifying cars bought between October 1, 2019, and March 31, 2020, the payment lowers to $1,875 and ceases on March 31, 2020.
Additional Electric Car Incentives
Based on where you live, your state, city or even your utility provider may provide additional incentives.
In Colorado, for example, hybrids are excluded from state automotive pollution inspections. Throughout California, several service providers offer incentives, such as a free charging device. California’s Renewable Car Incentive Scheme offers up to $7,000 when buying or leasing a qualifying zero-emission or plug-in electric vehicle.
