What is the electric car federal tax credit and how does it work?

In 2015, U.S. automakers sold 116,099 plug-in electric cars. An additional 14,172 electric cars were sold during January and February of 2016, representing an increase in sales from the prior year. As the plug-in electric car becomes more popular, can consumers still get a tax rebate for buying electric? Learn what the electric car federal tax credit means for consumers interested in buying plug-in electric vehicles and how to get the biggest tax credit.

What is the Electric Car Federal Tax Credit?

Section 30D of the Internal Revenue Code offers a tax credit for qualified purchases of electric cars and light-duty trucks. The tax credit applies to electric cars purchased after December 31, 2009.
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At minimum, recipients receive $2,500 in tax credit. They receive an additional $417 if the car’s battery has 5 kilowatt hours of power, and another $417 for every additional kilowatt hour. The electric car federal tax credit is capped at $7,500.

This tax credit is only valid if the car is purchased new; secondhand sales do not qualify. Cars that have been converted to electric also do not qualify. The tax credit has an expiration date, or a cap, that is different for each manufacturer and comes only after an automaker sells 200,000 qualified vehicles.

If you lease an electric car, the leasing company may take the credit on your behalf. They typically offer a better lease term for you to offset your loss of the credit.

Once the 200,000 cap has been reached, the tax credit for that type of car will phase out. During the first six months of the phase-out, only 50 percent of the tax credit will be offered for that model. During the last six months of the phase-out, 25 percent of the tax credit will be offered for that model of car. If a car is purchased after the phase-out period, no tax credit will be offered.

At present, General Motors and Nissan are closest to the 200,000 cap. If you want to buy one of their plug-in vehicles, now is the time.

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Any tax credit you receive must be used in the year you receive it at the point when you file your taxes for the year. You may qualify for a larger tax credit than you owe in taxes, in which case you will lose the rest of the credit instead of carrying over a portion of the tax savings.

If you are on the fence about purchasing an electric car and the credit will make or break the decision for you, consult with your tax advisor about your specific tax situation and for any changes to the tax code. They can offer practical insight based on your numbers.

Ultimately, if you want to buy an electric car, you will save money year round. The tax credit can partially offset the cost of purchase and make it more affordable, but it’s not the only incentive to go electric.