How Do Tax Credits Work for Electric Cars?

In this blog we will briefly explain about how do tax credits work for electric cars. Electric cars were born out of the need to reduce our dependence on fossil fuels, and that’s exactly what they are doing. Developed economies have been offering a number of incentives for buying an electric car in order to encourage people to make the transition from conventional internal combustion engine (ICE) powered vehicles to EVs. The aim is to mitigate climate change by reducing greenhouse gas emissions and air pollution.

Electric Cars

How does the United States government encourage individuals to purchase electric vehicles (EV) The federal government offers several types of incentives in order to promote EV adoption and use.

This article will explain how these tax credits work, who qualifies, and what other benefits are available.

Also Related:

What Percentage of Cars Will Be Electric by 2025

What Are EV Tax Credits?

The electric vehicle tax credit is a program available from the federal government that provides money back for buying vehicles. This incentive exists to help drivers switch to electric vehicles. When purchasing a new vehicle, first check whether it qualifies under the program, then find out how much tax credits you may be eligible for based on the year model and engine size.

There are two main types of tax credits available: the “Federal Tax Credit” and the “State/Local Tax Credit”. Each type from one another in terms of their eligibility and the benefits available to drivers. The federal tax credit for electric vehicles apply to all the states in the federation. Similarly, some states offer some type of financial incentives to promote electric vehicle adoption, including rebates, registration fee reduction, and tax credits.

Chart: Battery Electric Vehicle Consumer Benefit

Source: c2es

Take, for example, Colorado implemented a $4,000 state tax credit through 2021 on the purchase of electric vehicles. The state of California also has its own rebate system for buyers of electric vehicles. Under this program, qualified buyers receive a rebate of $2,500 off the price of an electric vehicle. Ultimately, Californians can save up to $10,000 on the cost of a new EV model when combined with the federal tax credit.

Also Related:

Are Electric Cars Better for the Environment

How Do Tax Credits Work For Electric Cars

Electric Cars

Source: ford

The federal government has introduced incentives to encourage consumers to purchase electric cars. 

One significant incentive is the Federal Tax Credit, which can be applied towards a vehicle’s cost or lease payments. The credit varies based on the type of car purchased, but it generally ranges from $2,500-$7,500 depending on the model year.

Since 2010, these tax credits have helped prospective electric cars buyers finance their purchases. All plug-in hybrid electric vehicles (PHEVs) and all-electric vehicles (EVs) are eligible for a tax credit up to $7,500. The amount of tax credit depends on the vehicle’s battery capacity. In addition, only EVs that are charged from the grid qualify for the credit.

Furthermore, the federal tax credit program’s manufacturer availability depends on the number of EVs a manufacturer has sold. Essentially, manufacturers become ineligible after selling 200,000 units of eligible EVs. The tax credit is reduced by half, to $3,750, for customers taking delivery of any eligible model for the next two quarters. Then, the incentive is cut further in half for the next two quarters before the EV manufacturer’s tax credit dries up.

Keep in mind that EVs manufactured by Tesla and General Motors (GM) are no longer eligible for tax credit, considering that both automakers have already reached the 200,000 unit threshold. There’s no denying that Tesla currently holds the lead as the largest producer of EVs in the United States. 

Also Related:

How Much More Efficient Are Electric Cars?

Chart: Tesla Dominates The U.S. Electric Vehicle Market

Source: statista

Interestingly, the Biden administration is pushing for Congress to restructure the tax credit program’s vehicle limit from 200,000 to 600,000 vehicles.

If this piece of legislation passes, automakers who are yet to surpass the 600,000-unit ceiling will still qualify for the tax credit. It seems like the federal government is trying to help out EV makers such as Tesla and GM. Essentially, this threefold increase would enable General Motors to regain the tax credit for its prospective EV buyers. Unfortunately, Tesla has surpassed the 600,000-unit threshold. Therefore, the company will not benefit from the proposed bill.

Nevertheless, if the bill becomes law, then it could affect the future of other EV producers. President Joe Biden has shown interest in revamping the tax credit program, especially the manufacturing cap. In a way, the Obama administration played an essential role in launching the U.S. EV industry. By providing generous subsidies, the federal government helped EV makers build their factories. Thus, it was foreseeable how the US EV industry would develop into what it had become today; a leading producer of EVs worldwide.

The federal government’s tax credits for electric cars can be credited to numerous aspects of society, including energy reduction, climate change mitigation, traffic congestion, air pollution, and the prevention of global warming etc., which are crucial to improving health and saving lives. To be eligible for the tax credit, EVs must meet certain requirements.  

Vehicle Eligibility Requirements

Also Related:

When Will Electric Cars Be Affordable

The federal tax credit program covers PHEVs and EVs. This means that every carmaker can produce and sell at least one PHEV or EV. However, they don’t need to make more than one type of vehicle. That doesn’t exclude any major automobile companies from participating in the federal tax credit program.

Accordingly, most states allow sales tax exemption on EVs, even though some require consumers to pay sales taxes on an additional basis. A few states also offer state income tax exemptions on EVs. Most states also provide other local incentives for EV purchases, including home improvement rebates, electricity rate reductions, and property value adjustments. With all these incentives, many EV owners claim to save thousands of dollars annually on their monthly electric bills. 

Notwithstanding, the federal tax credit program trumps all others. The most notable advantage is that those who purchase EVs with federal tax credits enjoy up to $7,500 per car. This amount is much higher than the average rebate provided by the other incentive programs. Moreover, the maximum tax credit amount depends on the manufacturer’s production capacity and the number of EV models being sold.

As previously mentioned, EV manufacturers must not exceed the 200,000-unit sales mark to be eligible for the rebate. The federal tax credit does apply to manufacturers that haven’t reached the production milestone.

In order to be eligible to claim a federal tax credit, certain requirements must be met. Some of which include:

  • The EV model must be manufactured by an eligible automaker. This means that the automaker must manufacture at least 20,000 EVs per year. However, as mentioned earlier, Tesla and GM have already surpassed this quota.
  • The model must be charged via an external power source. This includes wall chargers or public charging stations.
  • The vehicle’s maximum gross weight should not exceed 14,000 pounds.
  • A qualified vehicle is eligible for the federal tax credits only once in its lifetime.
  • Only the original owner can qualify for the tax credit, and it cannot be transferred. In a lease situation where the tax credit stays with a manufacturer or leasing company, it factors into the cost of a lease.
  • You should not buy the car solely for the purpose of selling it.
  • The vehicle must not be purchased for use in any country other than America. If a vehicle is moved to another country, it may become ineligible for a federal tax credit.

How Do You Receive the Federal Tax Credit?

Electric Vehicles: Where Are We Headed?

Source: ford

Also Related:

When Will Electric Cars Take Over

To claim the federal tax credit, electric vehicle buyers must register their new electric car with the Internal Revenue Service (IRS). This step is called “registration” or “recording.” Upon registering your EV, it’ll ask for certain information like your name and address. After receiving this information, the IRS will issue a certificate of eligibility (COE) that confirms your eligibility for the tax credit.

Once you’re issued a COE, you may begin claiming the tax credit. To do so, you must file a Form 5472 which contains your COE. If you purchased a used EV, the seller should provide you with a receipt containing the dealer’s official title for recording purposes. However, if the buyer did not acquire a COE, he or she cannot apply for the tax credit.

On top of this, some states require additional documents from EV buyers to prove they are eligible for tax credits. These documentation requirements vary between different states. As soon as the tax credit expires, the government automatically terminates the tax credit. 

You can claim your federal tax credit within 60 days of filing an income tax return for the year in which you acquired the EV. Generally, you need to keep track of the date when you submitted your return. For example, if you filed your taxes with the IRS on April 15, then you’d have until October 15th to submit your request.


The Federal Tax Credit program for electric vehicles is one of several initiatives implemented by the United States government to encourage consumers to purchase more environmentally friendly vehicles. It has been successful in helping automakers meet their production quotas for EVs. Although it is unclear how long the program will remain active, it seems likely that the government will continue offering incentives for consumers who choose to purchase EVs.

Recent Topics