Woman with keys to brand new car

The sale of battery-powered vehicles has surged across the United States, China, and Europe, while sales of conventional vehicles have stagnated. In 2021, electric car sales represented nearly 9% of global car sales, more than tripling their market share over two years. To assist this market, there are tax credits available in the United States for qualified electric vehicle (EV) models. Also, some states and utility companies offer additional incentives.

That means EV shoppers can qualify for up to $7,500 in federal tax credits plus potential state incentives. However, the tax credits are a bit complicated and vary a bit over time. So, let’s demystify how electric vehicle tax credits work, so you can take advantage of them and make an informed decision when you purchase a new EV.

Editor’s note: The following is not tax advice; please consult with a tax expert to learn if you can benefit from an electric vehicle tax credit.

What is a tax credit?

A tax credit is a dollar-for-dollar reduction in taxes owed to the federal government. For example, a $6,000 tax credit reduces federal income taxes owed to the IRS by $6,000. However, a tax credit has no value to the taxpayer if they have no tax liability. In other words, you must owe taxes to take advantage of it.

Sometimes, people confuse tax credits and tax write-offs, but they are not the same thing. A tax deduction or write-off decreases the total taxable income (not the total tax liability) by the given amount. Unlike with the tax credit, the value of a tax write-off varies on your tax rate. Therefore, a $6,000 tax credit is more valuable than a $6,000 tax write-off.

You probably won’t see the benefits of your EV tax incentive right away. If you buy an EV in 2022, you can apply for the tax credit when you file for your taxes the following April by using IRS Form 8936.

What types of vehicles qualify for the EV tax credit?

Two main types of passenger vehicles and light trucks meet the IRS criteria for the EV tax credit. Battery electric vehicles (BEV) run purely on electricity. Plug-in hybrids can run purely off of electricity for a certain distance and then rely on an internal combustion engine powered by fossil fuels. Qualified BEVs and plug-in hybrids are eligible for the federal tax credit. Non-plug-in hybrids do not qualify.

Which EV and plug-in hybrid models qualify?

New all-electric and plug-in hybrid electric vehicles (PHEVs) purchased in or after 2010 may be eligible for an EV tax credit up to $7,500. This includes new battery-powered compacts, luxury cars, sports EVs, SUVs, CUVs, and pick-up trucks. However, used and leased EVs and plug-in hybrids are not eligible for the tax credit.

In addition, the value of the income tax incentive varies by the capacity of the vehicle battery, and not all EV owners and vehicle models qualify for the full $7,500. Refer to the FuelEconomy.gov website for up-to-date information on Federal EV tax credits. This information is critical to help you calculate the total cost of a new electric vehicle or plug-in hybrid after the federal tax credit and any other incentives mentioned below.

As of February 2022, some EVs and plug-ins qualify for the full $7,500 EV tax credit, including the following 2022 models:

Other models qualify for a lower amount, including the following 2022 models:

  • Kia Sorento Plug-in Hybrid
  • Range Rover Sport PHEV
  • Ford Escape Plug-in Hybrid
  • Subaru Crosstrek Hybrid
  • Toyota Prius Prime Plug-in Hybrid
  • Volvo S90, and Mitsubishi Outlander Plug-in

Which EVs and plug-in hybrids do not qualify?

Unfortunately, the credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualified units have been sold for use in the United States. Tesla and General Motors reached this number a few years ago, so their new cars do not currently qualify for the EV tax credit. Remember that the credit values change over time, so use up-to-date numbers when calculating the net cost of your EV.

The following 2022 models have no available federal EV tax credit:

The U.S. government is gradually phasing out EV tax credits as sales increase. The federal government created the tax credit to help offset the expense of new technology as it is developed and reaches large-scale production. In theory, the cost of EVs should decrease over time, making the tax credit unnecessary.

Do I qualify for the EV tax credit?

The EV tax credit is a federal credit for income taxes owed to the IRS; you must owe enough taxes to take advantage of this opportunity. If you owe no income taxes to the IRS, then you can’t benefit from it.

Let’s say you buy an EV that qualifies for a $6,000 tax credit, and you owe $3,000 in income taxes. You could receive a $3,000 credit on your income taxes. However, the tax credit can’t be passed on to someone else, as only the original registered vehicle owner qualifies.

Are there state EV incentives?

In addition to the federal electric vehicle tax credit, some states and utility companies offer EV incentives. To determine if programs exist in your area, refer to Tesla’s EV and solar energy incentive page. The perks for EVs vary widely and may include state tax or non-cash incentives, such as free municipal parking or access to car-pool lanes. There are also some utility rebates for installing Level II home chargers.

Editor’s note: An earlier version of this story suggested that the EV tax credit can be carried forward for five years. This is incorrect.

Feature image courtesy of ANTONI SHKRABA

By Sarah Lozanova

Sarah Lozanova is an environmental journalist and copywriter and has worked as a consultant to help large corporations become more sustainable. She is the author of Humane Home: Easy Steps for Sustainable & Green Living, and her renewable energy experience includes residential and commercial solar energy installations. She teaches green business classes to graduate students at Unity College and holds an MBA in sustainable management from the Presidio Graduate School.