The number of hybrid and plug-in electric vehicles (EVs) on the road in America is small compared to the amount of traditional, gas-powered cars, but that figure is growing.
If you’ve considered buying a hybrid vehicle, you may be happy to learn that you could receive a federal income tax credit of up to $7,500 in the year of your purchase. Additionally, almost 20 states offer even more state tax breaks and incentives. (Unfortunately, Tennessee currently does not; Georgia is the only Southeastern state that offers additional tax credits.)
Be aware, though, that the federal tax credit is subject to a complex phaseout rule that could reduce or eliminate the tax break for cars made by certain manufacturers. In fact, the vehicles of two manufacturers have already begun to be phased out.
Tax credit basics
There are no income restrictions for the federal tax credit, which means anyone can qualify if the following stipulations are met:
- You must purchase (not lease) the vehicle. (The tax credit for a leased vehicle actually belongs to the manufacturer.)
- The vehicle must be a qualifying new (but not used) EV.
- To qualify, the vehicle must be either fully electric or a plug-in electric/gasoline hybrid.
The credit equals $2,500 for a vehicle powered by a four-kilowatt-hour battery, with an additional $417 for each kilowatt hour of battery capacity beyond four hours. The maximum credit is $7,500. Buyers of qualifying vehicles can rely on the manufacturer’s or distributor’s certification of the allowable credit amount.
How the phaseout rule works
The federal tax credit begins phasing out over four calendar quarters once a manufacturer sells more than 200,000 qualifying vehicles for use in the United States.
The IRS recently announced that GM sold more than 200,000 qualifying vehicles through the fourth quarter of 2018, which triggered the phaseout rule for GM vehicles as of April 1, 2019. Thus, the credit for GM vehicles purchased between April 1, 2019, and Sept. 30, 2019, is now reduced to 50% of the otherwise allowable amount. For GM vehicles purchased between Oct. 1, 2019, and March 31, 2020, the credit will be reduced to 25% of the otherwise allowable amount. No credit will be allowed for GM vehicles purchased after March 31, 2020.
The IRS also previously announced that Tesla had sold more than 200,000 qualifying vehicles through the third quarter of 2018. So, the phaseout rule was triggered for Tesla vehicles effective Jan. 1, 2019. The credit for Tesla vehicles purchased between Jan. 1, 2019, and June 30, 2019, is reduced to 50% of the otherwise allowable amount. And for Tesla vehicles purchased between July 1, 2019, and Dec. 31, 2019, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for Tesla vehicles purchased after Dec. 31, 2019.
Despite the phaseout kicking in for GM and Tesla vehicles, there are still many other EVs on the market if you’re interested in purchasing one. The IRS has a full list of manufacturers and credit amounts on its website.
Contact us at KraftCPAs for more information about the tax breaks that may be available for these vehicles.