On average, all-electric (AEV) and plug-in hybrid (PHEV) vehicles cost more than conventional gas-powered cars. However, the base prices don’t take the federal & state tax credits and other incentives into account. These incentives and credits can greatly reduce the upfront cost of an electric vehicle to allow more drivers to take advantage of fuel savings.
Federal Incentives for Electric Vehicles
The Plug-in Electric Drive Vehicle Credit is the primary federal incentive program for electric car owners in the United States. This incentive will apply to buyers who purchase a qualified electric vehicle after August 16, 2022, which is the date that the Inflation Reduction Act of 2022 takes effect.
The federal government offers a tax credit worth $7,500 for the purchase of an electric vehicle as long as it meets these criteria:
- The EV was purchased after December 31, 2009
- The electric vehicle has a traction battery – which most of them do
- There is at least 4 kilowatt hours (kWh) of capacity in the battery
- It uses an external plug-in source to recharge the battery
- There is a weight rating of up to 14,000 lbs. For the EV
- Emissions standards are met
While the federal tax credit for electric vehicles applies to all-electric and plug-in hybrid cars, the amount you can claim is based on the car’s model. Before you shop for your next electric vehicle, do your research to see exactly how much your new car will get you in the form of federal electric car tax credits.
The tax credit also has a “phase out” plan built into it that depends on which company manufactured your car. This phase out kicks in at the beginning of the second calendar quarter after 200,000 eligible AEVs and/or PHEVs have been sold. The good news is a majority of electric cars still qualify for this tax credit and the phase out for this credit won’t occur any time soon.
It’s worth noting that Tesla vehicles are no longer eligible for the full incentive. The only vehicles eligible for the full credit were those delivered by December 31, 2018. Vehicles delivered between January 1, 2019 – June 30, 2019 received a credit of $3,750; those delivered between July 1 and December 31, 2019 received $1,875. Beyond that date (December 31), no credits are available for Tesla.
State and Local EV Tax Credits
In addition to the federal tax credits available for purchasing an electric vehicle, many states offer additional incentives and rebates that can help you save money on your electric car purchase. California offers residents a rebate (not tax credit) on the purchase of fuel-cell vehicles and electric cars, including plug-in hybrids. Income and price limits apply for the Clean Vehicle Rebate Project.
California offers two primary rebates for potential EV owners:
- The Clean Vehicle Rebate Project offers rebates from $1,000 to as much as $7,000 for the purchase or lease of new electric cars that are classified as zero-emission vehicles. This includes electric, plug-in hybrid electric and hydrogen fuel cell models (which used to qualify for a different credit).
- The Alternative Fuel and Advanced Vehicle Rebate (San Joaquin Valley) offers up to $3,000 in rebates for qualifying electric vehicles—such as plug-in hybrids and battery electrics—for San Joaquin Valley residents and businesses.
What Happens if You Recently Purchased an EV?
If you took delivery of a new EV before Aug. 16, 2022, the new law does not apply to you.
If you signed a “written binding contract” to purchase an EV before Aug. 16, but did not take possession until after that date, the IRS has said you can still claim the tax credit under its rules.
EV owners who buy and take possession of their EVs between Aug. 16 and Dec. 31, will be subject to the current EV tax credit rules — not those that kick in on Jan, 1, 2023. To be eligible for the tax credit, a car must both have been assembled in North America and not exceed the manufacturing cap. However, the price, income limits and sourcing requirements don’t apply.
Does This Apply to Used and Leased EVs?
Under the new rules, people who lease a new EV cannot claim the credit, but their leasing company can. Leasing companies often use it to lower both the down and/or monthly payments.
The new law also created a tax credit for the purchase of previously owned electric vehicles that starts next year. The used car must weigh less than 14,000 pounds and cost $25,000 or less when purchased from a dealer. The model year must be at least two years earlier than the current calendar year. The credit is 30% of the purchase price or up to $4,000, whichever is less. The buyer’s adjusted gross income also cannot exceed $75,000 for a single taxpayer or $150,000 for married taxpayers.
An EV purchased new can only be claimed for a used-vehicle credit once, but it could still qualify if the vehicle had previously been granted a new-car tax break. Buyers can claim the used-car tax credit every three years on different vehicles.
What’s Coming After 2023?
More changes will take effect after 2023. For example, if any battery components (starting in 2024) or critical minerals (starting in 2025) come from a “foreign entity of concern”—which includes China and Russia—no credit will be available.
Also starting in 2024, the tax credit can be transferred to a registered dealer at the time of purchase, rather than claiming it on your tax return. Federal tax credits are set to expire after 2032.
Save Even More When You Power Your EV with Clean Energy
Doing your research ahead of time is the best route to take when it comes to purchasing an electric car and qualifying for available rebates and incentives. If you’re interested in saving even more, consider installing a solar panel system on your home so you can power your EV with clean, reliable energy from the sun.
Not only will you reduce your reliance on fossil fuels for charging your electric vehicle, but by generating free energy from solar panels, you can effectively offset your electricity costs to power your home and EV. If you’re ready to save money and power your home with clean, reliable energy, contact us today for a free customized solar quote.