How Do Federal and State Incentives for Electric Cars Work?

A primer on EV tax credits and how to take advantage of them.

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If you are getting ready to buy an electric car, you might have seen automakers advertising the price of the vehicle with this qualifier: “after the $7,500 federal tax credit.” But that might not mean what you think it means. Let’s dig into what the tax credit really is and how you can get it.

What is EV Tax Credit?

An electric car tax credit is money you get back from the government after you purchase a qualifying new electric vehicle. Both plug-in hybrid electric (PHEV) and full battery electric vehicles (EV) are eligible for the federal tax credit, but the amount will vary based on battery capacity. The minimum credit is $2,500, and it maxes out at $7,500.

To be clear, this isn’t a deduction or a discount, but an actual tax credit, which reduces the amount of federal income tax you owe. Therefore, if you owe $10,000 in federal income tax and qualify for the full $7,500 credit, you’ll only pay $2,500 in taxes that year.

If you opt to lease a vehicle, however, you do not qualify for the credit because it goes to the leasing company. However, buyers should ask the dealer about a discount on the lease because of the credit, and that could lower monthly payments.

Do States Offer Additional Credits or Rebates?

On top of a potential $7,500 federal tax credit, some states offer credits and rebates for not only purchasing an electric vehicle but also installing an at-home charging station. For example, Connecticut offers a reduced vehicle-registration fee for EVs and also provides up to a $2,000 rebate on the purchase of a new EV. Other states, like Indiana, offer special time-of-use (TOU) charging rates for EV owners.

To see what you might be eligible for will require some research, but the National Conference of State Legislatures website has a comprehensive and easy-to-understand listing of current state policies.

How Do I Get the Credit?

The tax credit doesn’t appear immediately when you purchase an electric vehicle. You must wait until you file your taxes for the year in which you bought the vehicle. And, of course, there’s a form that you fill out Form 8936 and attach to your return. As noted above, the tax credit applies only to new electric cars. Vehicle manufacturers cannot have sold more than 200,000 units under the credit, and the vehicle must be final assembled in North America to be eligible for the credit. On January 1, 2023, certain used vehicles may be eligible for up to a $4,000 credit due to the Inflation Reduction Act's changes to the federal tax credit for EVs.

Which Vehicles are Eligible for the EV Tax Credit?

If you’re looking to purchase an electric car keep in mind that not every EV will qualify for the credit, and the question itself got more complex with changes to the law on August 16th, 2022.

Vehicles purchased, and taken possession of prior to December 31st, 2022 fall under a combination of the existing rules and the new ones. Starting January 1st, 2023 the government will phase in even more stringent requirements regarding the materials that go into the batteries, where they’re mined, and produced.

The IRS keeps tabs on which vehicles are eligible for the tax credit, and since this agency will be the one issuing the credit, start with the IRS website to verify which vehicles are eligible and how much money they qualify for.

For buyer’s who’ve signed a purchase agreement prior to August 16th, 2022, then you’re in luck: according to the IRS, nothing changes, and you can proceed with the existing tax credit under the previous rules.

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Jill Ciminillo
Jill Ciminillo is a Chicago-based automotive writer, YouTube personality, and podcast host, with her articles and videos appearing in outlets throughout the U.S. Additionally, she co-hosts a weekly radio show on cars for a local Chicago station. Previously, Jill has been the automotive editor for both newspaper and broadcast media conglomerates. She is also a past president for the Midwest Automotive Media Association and has the distinction of being the first female president for that organization.