Federal Electric Vehicle Tax Credit, Fully Explained

Jul 2, 2021   

We’d like to take a moment to clear up the confusion that commonly surrounds the $7,500 federal tax credit incentive for electric vehicles.

Disclaimer: Tesla no longer qualifies for the federal tax credit in any capacity, after hitting its 200,000 vehicle limit in 2018. Tesla vehicles delivered on or before December 31, 2018 qualified for the full tax credit before it went through a phase-out period in 2019 wherein Tesla vehicles qualified for $3,750 in the first half of 2019, then $1,875 for deliveries from July 1st to December 31st, 2019.

There is however potentially good news on that front as a bill was introduced that could make Tesla eligible for a new $7,000 incentive on an additional 400,000 vehicles before another phase-out of the credit would occur.

With that out of the way, every other automotive brand excepting General Motors (Chevy) still qualifies for the $7,500 federal tax credit.

The tax credit was implemented to make electric vehicles more desirable, and became effective for vehicles purchased in 2010 and later — when options in the market were few and far between, and certainly not as attractive or practical as they are today.

To qualify, it must be a production vehicle by an automaker. (Not a homemade or converted internal combustion engine vehicle.) Gross weight of the vehicle must not exceed 14,000 pounds. Finally, the vehicle must rely on “an electric motor for propulsion to a significant extent” which stipulates that battery capacity must exceed 4 kWh, and be capable of being recharged from an external power source.

The credit is only available to the original purchaser of the vehicle, and when leased to a consumer the leasing company may claim the credit and apply it to a lease. (Although there is no obligation for a leasing company to pass along the full rebate to a lessee, many do.)

It is important to note that this isn’t an immediate credit, or even a rebate that’s guaranteed. Buyers will only benefit from the full tax credit at tax time if their federal tax liability, meaning the amount that is owed or withheld, meets or exceeds $7,500 or the phase-out amount of the tax credit. Any amount up to $7,500 could still be refunded or be used to reduce tax liability. 

The tax credit correlates directly to the amount of federal taxes owed or withheld as it’s not refundable, so many buyers do not realize the full amount of the $7,500 incentive.

For example, somebody that owes $5,000 in the year the vehicle was purchased would reduce their tax liability to $0; however, in the next year they would no longer be able to claim the tax credit to realize the other $2,500. In a similar scenario, somebody that’s had $5,000 in federal taxes withheld from their paychecks would be refunded $5,000 but not the full credit. 

As for further examples, somebody with no federal tax liability would see no benefit from the tax credit as it’s not refundable. On the other hand, somebody that owes or had $7,500 or more in federal taxes withheld would reduce their tax liability by the full amount of $7,500. Generally this would apply to electric vehicle buyers making over $60,000 in taxable income: at that income level, pending deductions or dependents, they would benefit from the full credit.

Tesla buyers could benefit from a new $7,000 tax credit in the future assuming the GREEN act is ultimately passed — and there’s a distinct possibility that it will. This could completely change the terms and conditions of the incentive, potentially making it point-of-sale and easier for consumers, so we’ll keep readers up-to-date on the latest legislation and policies.

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