How does US Federal Tax Credit for Electric Vehicles work? | Update on tax credit phase out of Tesla & General Motors

There has been a lot of misconceptions around IRC 30D - Federal Tax Credits for electric vehicles, especially after the news of Tesla and GM’s tax credit phase-out. Are you confused as well? This article may help you out.

How much you can save with IRC 30D – EV Tax credit?

Simple answer is: Plug-in hybrids (PHEV) and full-electric vehicles (BEV) that are bought in/after 2010 qualify for tax credit of up to $7,500. However, the word “up to” requires further explanation and below three considerations.

Key requirements / considerations for the EV tax credit

1. Battery capacity of the electric vehicle:

The plug-in electric vehicle that has at least 4 KWh of battery capacity is eligible for a minimum tax credit of $2,500; and it increases $417 extra - for each additional KWh capacity above 5 KWh.

For example:
➤ Toyota Prius Plug-in Hybrid (2012-15) that has the battery capacity of 4.4KWh is eligible for $2,500.
➤ But the newer Prius Plug-in Hybrid (2017-2019) that has a battery capacity of 8.8 kWh, is eligible for $4,502.
➤ A Chevrolet Volt (2019) with a battery of 18.4KWh can get you the maximum tax credit of $7,500.

2. Number of EVs sold by the manufacturer:

The whole objective of the federal tax credit scheme was to encourage the electric cars sales. So, when a manufacturer sells more than 200,000 vehicles, the tax credit for that car maker will start phase-out – gradually

Tesla touched the threshold of 200,000+ cars at the end of Q2-2018 and the phase-out is in progress. This is how IRC 30D federal tax credit works for Tesla:

Tesla Model X / Model S / Model 3	Tax credit %	Tax credit Amount
Bought before 31st Dec 2018	Full	$7,500
Bought between 1st Jan 2019 - 30st Jun 2019	Phase Out 50%	$3,750
Bought between 1st Jul 2019 - 31st Dec 2019	Phase Out 25%	$1,875
From 1st Jan 2020	Nil	$0

Next to Tesla, General Motors (GM) also reached the 200,000+ sales and the tax credit phase out is triggered as well. Below chart from InsideEVs gives an overview of federal tax credit balances for the top electric vehicles in the United States of America.

3. Your own tax bill:

This is obvious, yet the question pops-up often!

Maximum tax credit benefit of $7,500 is available only to those whose annual tax payment is equal/more than $7,500. Assume that you have purchased a Nissan Leaf (which is eligible for a maximum $7,500), but your total tax bill for the year is only $4,000; then you can claim only the $4,000. There’s no way to get refund of the remaining $3,500 or to carry forward to next year.

Other requirements to be eligible for IRC 30D - Tax credit

Above mentioned are the critical constraints that determine the federal tax credit of electric vehicles. In addition to them, below obvious conditions must also be met. 

➤ The purchased electric car must be mainly used in the United States.
➤ The tax credit is applicable only for the purchase of new electric vehicles; used electric cars are not eligible.
➤ The benefit is annual; can not be carried forward.
➤ Electric vehicles purchased with an intention to resell is not applicable for the tax credit too.

Are there any other incentives in addition to the federal tax credit?

Yes, in addition to the country-wide federal tax credit benefits, many states also provide incentives for the purchase of electric vehicles. Some states give direct financial incentives (further tax credit), and some other give the incentive in terms of exemptions from fees, inspections, carpool free access, free parking ...etc. 

For example: California offers $2,500 tax rebate, in addition to the federal tax credit of $7,500. So, when you buy a full electric car (BEV) such as Nissan Leaf, you’ll get a total tax rebate of ‘up to’ $10,000. (No wonder why California tops at the most number of electric cars presence in the United states). 

Which plug-In electric vehicles qualify for the federal tax credit ?

The Internal Revenue Service (IRS) agency maintains the entire list of plug-in hybrids (PHEV) and full-electric vehicles (BEV) that qualify for the Federal Tax Credits for the purchase of electric vehicles. You can see the entire list of qualified cars and amounts at the official IRS site – link here.

Additional information & useful links for claiming the tax credit:

➤ Plug-In Electric Drive Vehicle Credit (IRC 30D)
➤ Notice 2009-89: New Qualified Plug-in Electric Drive Motor Vehicle Credit
➤ Notice 2009-54: Qualified Plug-in Electric Vehicle Credit
➤ Notice 2009-58: Qualified Plug-In Electric Vehicle Credit Under Section 30
➤ Energy Incentives for Individuals in the American Recovery and Reinvestment Act

Hope we’ve answered all the frequently asked questions over the federal tax credit schemes and state incentives for full electric and plug-in Hybrid vehicles. Are there any more details that you want to know? Please email or comment.